Debt can feel like the albatross of your financial life if it’s weighing heavily on your wallet and on your mind. But before we tackle the subject of freeing yourself from it, it’s important to realize that not all debt is bad for you.
The Bright Side of Debt
Establishing some level of debt is usually necessary in life. Borrowing money wisely and affordably can help you acquire large ticket items when you don’t have enough cash to pay for them. We’re talking about homes and vehicles, mostly – not necessarily jumbo flatscreen TVs and JetSkis.
Miranda’s Tip: When it comes to high-priced items, save for what you want and borrow for what you need.
The other upside of debt is the fact that it establishes your credit rating, which determines your pricing on future loans. Without any borrowing activity within your credit history, there’s no indication of your consumer behavior and no gauge for your credit score.
Miranda’s Tip: When it comes to your credit cards, keep your balances under 30% usage of your credit limits to maintain strong capacity and boost your credit score.
The Snowy Side of Debt
There are two highly popular debt repayment strategies we talk about with members. Both focus on one major bill at a time, so your debt is easier to manage.
They are called “The Snowball” and “The Avalanche” and you can explore each method to determine which you prefer for your own debt repayment plan. We recommend you begin by listing in a chart all your debts and including the creditors you owe, your minimum payments, your overall balances, and your interest rates.
The Debt Snowball: Start Small
With this method, you focus on eliminating the smallest balance you owe first, while also making minimum payments on all your other debts. By focusing on a smaller debt, you will see success sooner when you remove an entire line item from your chart, and it will mentally motivate you to knock out other progressively larger balances the same way.
The Debt Avalanche: Start High
This method tackles your highest interest rate first, regardless of balance, then progresses to your lowest interest rate. This can save you some money in the long run because you’ve eliminated your higher priced debt first your lesser interest rates will be okay sitting for longer.
Miranda’s Top Seven Debt Repayment Tips
Find a Way to Budget That Works for You
Between spreadsheets, tools built into your online banking, apps that will budget for you, or a cash envelopes system, there are a lot of choices. Finding something that works for you and sticking with it will be important.
Learn Your Spending Habits
Pulling expenses from the last few months and categorizing them helps you figure out how much money you have left to save or pay down debt and where you should trim your budget.
Partners Let the people in your life know you are working toward a financial goal. Finding like-minded people or those who want success for you will help you stay the course if things get tough.
Don’t Deprive Yourself
If you have decided to go on a debt repayment journey, you may have to say “no” to a lot of things. Remember this is temporary, and it’s okay to reward yourself once in a while. Set smaller milestones and celebrate when you hit them!
Have an Emergency Savings Fund
Life happens, right? Don’t blow your budget or set yourself up to fail by not accounting for emergencies. Start off by saving at least $1,000 to cover unexpected costs or to buy you some time while you find another solution.
Remember You’re Not Alone
Sometimes it feels like the only way to live these days is with heaping piles of debt. It doesn’t have to be that way! Try seeking out friends, family, or internet groups dedicated to smart money. Can’t find anyone else? Call me!
Increase Monthly Cash Flow
There are several ways you can trim a budget to increase your monthly cash flow to put more toward your debt. Cancel unnecessary subscriptions, refinance current loans, consolidate your debt, monetize a hobby or skill, or sell items from around your home.
Learn more about your debt from a previously live broadcast of Elements Live. Click here to watch the seminar.
About the Author
Miranda Finley has served Elements Financial for 7 years. We call our experts like Miranda “Relationship Managers” because their primary purpose is to build strong connections between the credit union and our partner organizations. Miranda is an expert at tackling debt, credit management, budgeting, among many other financial topics. She lives in Johnson County with her husband, Scott.