Debt. You don’t know how it happened (or maybe you do), but suddenly it feels like you’re knee-deep in it. Whatever the amount, being in debt can be a horrible, stomach-wrenching feeling but remember: not all debt is created equal. And while it’s not something to be ashamed of (we all have some form of debt at some point in our lives), it is something that you can — and absolutely should — control.
So, don’t get discouraged, and don’t write it off as a hopeless burden you’re always going to have to deal with. Paying off your debt is absolutely within reach if you follow a few basic rules. We’re here to tell you why and how, so we teamed up with financial expert and CEO at Ellevest, Sallie Krawcheck, to walk us through how to pay down debt for good.
The tips ahead aren’t easy to do, but if you stay focused and make it a habit, you can make 2018, the year you cleared your debt. Let’s get started, shall we?
1. WRITE DOWN ALL YOUR EXPENSES
Before you do anything, you need to figure out where you are spending your money. Get a money diary and start documenting all your expenses. You can even do it over Excel or go back to your credit card statements. Whatever your method, know where your money is going.
You may be thinking “I know what I’m spending my money on,” but in reality, writing it down (even digitally) will help you get a better sense of where you can cut back and start saving more money. These expenses include everything from Netflix to student loans, groceries, and clothing. Get it done.
2. PAY OFF YOUR “BAD DEBT”
First things first: not all debt is bad debt. Some debt can be “good,” but most of it it is “bad.” So, how can you tell what is “good debt” and what is “bad debt?” One form of potentially good debt can be student loan debt. Think about it: you getting a great education can lead to a higher-paying job, which can increase your earnings over time. Plus, student loan rates can be as low as 3.4% (possibly higher, depending on when the loan was taken out). You may also be able to deduct student loan interest payments of up to $2,500, depending on your income level, which reduces the annual cost of the loan. Call your provider to see if you qualify.
Another form of “good debt” can be a mortgage if you’re a homeowner. This is considered good because, well, you have a home, which if the value of the home goes up over time, can also be a form of investment. Interest rates on mortgages can be low (like 4%) and the interest payments can be tax-deductible — which, again, can make this kind of debt less expensive. So, you see, some debt can be “good,” but much of it is “bad.” And too much debt…when you’re drowning in it…is always bad.
Ok, so that’s the “good debt.” Now, let’s get to “bad debt.” One type of debt that is never ever good? Credit card debt. This is because when your credit card debt has really high-interest rates, you pay even more money over the life of your debt.
“If you have credit card debt, pay it off now. Do not go. Do not collect $200,” says Krawcheck. Credit cards can have an interest rate anywhere from 12.0% to 22.6%, which is definitely not a favorable number. With a single swipe of our credit cards, we can have whatever we desire but resist the urge to spend until you pay off your previous credit debt. The good news is that while you may be drowning in “bad debt”, you certainly don’t have to carry it over into 2018. Pay off credit cards in full now…or as soon as you possibly can.
3. MAKE SURE YOU’RE NOT PAYING TOO MUCH STUDENT LOANS
Depending on your income, you may qualify to refinance your loans in order to get a lower interest rate. With student loan refinancing, you’re taking out a brand new student loan to pay off all of your separate existing loans. This method doesn’t combine your loans, but rather creates a brand new loan for you.
The new loan payment and interest rate will be based on your credit score, so having great credit could mean substantially lower payments. Check refinance rates with LendKey. It only takes a few minutes; plus, they only do a soft pull of your credit so you literally have nothing to lose.
The benefits of student loan refinancing include: Possibly having a lower interest rate and payment on your new loan and getting a single bill for all of your loans.
Yes, it takes some time to refinance your loans, but trust us, it’s worth it. Krawcheck says you can consider keeping debt that costs you less than 4% a year outstanding and investing your money in a diversified portfolio.
4. PAUSE THE EMERGENCY FUND
While it’s safe and reassuring to have a Emergency Fund if all else fails, the present situation is an emergency in itself. You will be happy you subtracted some money from your Emergency Fund now to pay off credit card debt, or any debt. It’s better to use some of this money now while your debt interest rate is slightly lower, rather than years down the line.
5. GO FOR THE HIGHEST INTEREST RATE
Focusing on the debt that has the highest interest rate is critical, so as to put a halt on it ASAP. Once you knock that one of the lists, move onto the next. There’s nothing more rewarding than penciling off debt after debt.
6. CHAT WITH YOUR LENDER
Give your credit lender a call and see if there is anything they can work out to your advantage. Discuss the possibilities of reducing your interest rate or waiving late fees to give you a little jump start. They may or may not be up for the favor, but asking every three to six months does not do any harm.
7. MAKE A BALANCE TRANSFER
Believe it or not, there are credit card companies that charge 0% if you transfer your money to their card. Go ahead and transfer your money, but the trick is not to make any purchases at the time. Instead, focus on lowering the balance outstanding, which will help to knock down your credit card balance. Doing this will reduce your interest rate, but remember you can’t depend on it to fix everything.
8. CUT OUT NONESSENTIALS
If you want to get rid of debt, you have to start trimming your spending — by a lot.
That lunch you bought over break? Nonessential. Cable. Yoga? Spotify. All nonessential — you don’t need these luxuries and getting rid of them will really help you to chip away at that ugly debt. It’s time to cut these nonessentials out of your life. You can always add them back on once you’re debt free and can afford to pay them off.