It’s no secret that many people struggle to pay off their debt as fast as possible. The average American household has about $134,600 in personal debt, according to the most recent survey conducted by the Federal Reserve.
The most common types of debt include credit card debt, mortgages, car loans, and student loans. There is an argument that some debt is good, such as mortgages and student loans.
These types of loans increase your net worth and have future value. While other debts, such as credit cards and auto loans, are considered bad debt. This is because the value of what you purchased decreases immediately after you buy it.
Either way, you want to minimize the amount of debt good or bad that you have. In this post, Megan and Tim of My Life Habit share eight secrets to paying off debt in hopes that these tips can inspire and encourage you to live debt-free.
How To Pay Off Debt Fast
1. Create a Budget and Stick to IT!
The best-kept secret for paying off debt is to create a budget. A budget helps to allocate your money to the specific areas where you need to spend and see what areas to cut back in. The 50-20-30 budget model can help you begin this process.
From your total yearly income, 50% will go toward needs (home, auto, food, clothes, utilities) 20% will go toward savings (retirement, school, insurance, emergency fund) 30% goes toward wants (travel, entertainment, eating out).
A good rule of thumb is to live below your means or spend less than what you earn. Debt can grow and increase rapidly if your spending outpaces your earnings. Creating a budget and sticking to it helps you to stay within your spendable income and helps prevent debt.
If you develop a budget and see that your income is not enough to handle your expenses, then you may need to eliminate some of the 30% “wants” category items. You can also create more income with a part-time job on the weekend or side hustle in the evenings.
2. Create a Debt Payment Plan
The secret to paying off debt is creating a consistent and systematic payment plan to decrease those balances you have for each card or loan. One of the reasons most people stay in debt is that credit card companies and other loans only require a minimum payment each month.
However, if you continue to only pay this amount, your balance will continue to grow with interest and any additional charges. If you have a tremendous balance, you can’t seem to reduce, an effective way to help with your payment plan is to open a credit card with 0% APR.
By transferring the balance from your high-interest account to a 0% card, this allows you to take 12-18 months to pay it off without building additional interest each month. The key here is to stay vigilant in your monthly payment plan to pay down the debt before the initial 0% skyrockets to a high APR at the end of the introductory term.
We have used this technique on our annual auto insurance premium to pay the entire year upfront and receive a discount on the auto policy.
3. Avoid Late Fees
Not only do late fees become costly, but not paying your bills on time can damage your credit. Set reminders in your calendar to pay your bills on time. Many companies offer autopay, so you don’t even have to remember to send in payment.
It is essential to develop a system that works for you. Whether you use a regular calendar, calendar reminders, or email notifications, you will want to figure out what is best for you.
4. Set Up a Spending Account
A spending account is a great way to set aside funds in advance for something special to splurge on. It may be for a vacation, a new wardrobe, or monthly massages. You will want to set a goal amount and then put money aside towards this goal.
One of the easiest ways to do this is to have a designated portion of your paycheck automatically deposited into an exclusive “spending” account. You can also make additional contributions to this when you cut back on something else. For instance, if you decide to eat in instead of going out for a pricey restaurant meal.
You take that amount and place it into your spending account. The best part about a spending account is it helps you avoid buying something you can’t afford since you have already saved for it!
5. Maintain Good Credit
It is vital to keep a high credit score, so you have access to the lowest interest rates on credit cards and loans. It also makes it easier to qualify for home and apartment rentals, lower insurance rates, and avoid security deposits on cell phones and utilities. Experian has an excellent article that explains the benefits of having a high credit score.
If you do use credit cards for purchases, it is important to not carry a balance on them and thus avoid paying interest fees. You should refrain from buying anything you can’t pay off in 30 days when your credit card payment is due.
It is also critical to make sure you pay the credit card bill on time. What if you have a credit score that is less than stellar? Try these three easy steps to help rebuild your credit.
6. Paying Off Debt by Cutting Expenses
Cutting expenses allows you to have more funds available to help spend down your debt. Here are a few of the high costs for many families and ways to decrease the amount you spend in each area.
- Housing: Since housing is typically the highest expense, we incur, identifying ways to lower this is important. If you are renting, consider purchasing a home so your money is building equity and the home values typically appreciate over time. If you don’t have the funds available for a down payment, there are ways to save for a home.
- Automobiles: Consider buying a certified preowned vehicle that you drive for several years. This way, you own the car and can take the money when you sell it to purchase your next vehicle. This gets you out of the cycle of continually paying monthly payments for a vehicle.
- Eating Out: It is always more expensive to eat out at a restaurant than eating at home. Try bringing your lunch to work or having a potluck dinner with friends. The key is to have a meal plan for what you will be making, so you have all the ingredients on hand. You also want to schedule a time to prepare your meals. This way, you won’t have to go out to eat or get something delivered.
7. Use the library
If you haven’t used the library in recent years, a lot has changed. You can utilize many of their services online. They have eBooks and audiobooks you can download to your computer or tablet.
You can also reserve DVDs and CDs online and then pick them up at your local branch. Many sell books, DVDs, and CDs for a nominal fee. Our library system even has free passes to local museums that you can check out and use!
This secret to paying off debt is actually a method to help prevent you from unnecessary medical bills due to illness or unexpected costs should a motor vehicle accident or natural disaster impact your life.
These events can happen unexpectedly, and insurance is an excellent investment to protect you & your family from accumulating debt. Many people fall into debt due to a medical emergency or accident that creates enormous costs they cannot absorb and never recover from financially.
By having the right insurance, you can avoid these unforeseen expenses and the potential to fall into debt.
- Health insurance: Most employers offer medical plan options to include medical, dental, and vision. If you do not receive insurance from your company or you are self-employed; there are various plans to consider, such as a health sharing ministry.
- Property Insurance: Whether you rent or own a home, it is important to protect where you live. If there is damage or theft to your residence, it can cause loss. There are affordable plans in the market to consider for coverage.
- Life Insurance: Unfortunately, a number of people think that nothing will happen to them. However, there are those stories where death happens and destroys the family’s financial picture.
- Short-Term and Long-Term Disability Insurance: If you have a fall or get into a car accident that causes you to be unable to work, disability insurance provides a percentage of income. When you lose income, you cannot pay your bills and expenses, which may cause debt to occur.
- Vehicle Insurance: Whatever vehicle you use for work and recreation, it is one of the most important types of insurance to prevent debt. There are different coverages to consider, but basic protection of collision, comprehensive, uninsured motorist and personal injury will help minimize the risk of having high costs pile up. Another portion of auto insurance is purchasing an umbrella policy. It is a tool to help protect you if you hit someone else and gets sued or if someone hits you and not able to pay your bills.
How To Pay Off Debt Fast Summary
You can live a life free of debt by developing a plan to pay it off. It will take a lot of hard work and dedication. You have to get to the point that you don’t want to continue living a life in debt.
If you are overwhelmed or cannot tackle this on your own, consider working with a credit counselor. Getting out of debt will take time and patience on your part; you will need to change the way you think about and handle your finances.
By using all or some of the eight secrets to paying off debt mentioned above, you can be on your way to becoming debt-free!
Megan & Tim are the founders of My Life Habit, a lifestyle blog that helps readers develop better habits. They share creative ideas and tips for saving money, healthy living, decorating, organizing, and planning while living their dream in the sunshine state with their two cats.