How To Pay Down Debt And Save Money
Debt is holding you back from your financial goals and your future. We’ll show you how to pay down debt and save money.
Debt is stressful, and it’s expensive too! Having debt holds you back, making it hard to achieve financial goals like building an emergency fund, investing, saving for a home, and paying for educational expenses. We’ll show you how to pay down debt faster, how to pay down debt when living paycheck to paycheck, and two proven strategies to pay off debt.
Why debt is so hard to pay off
If you have credit card debt, it can feel like no matter how many months, and years you make payments, the debt isn’t getting smaller. There are two reasons for this; you’re only paying the minimum amount due each month and interest.
Typically if you own more than $1,000 on a credit card, the minimum payment will be about 2% of your balance. So on a $1,500 balance, the minimum monthly payment would be just $30. If you owe less than $1,000, the minimum is usually a fixed amount, often $25, but it varies by card.
If you paid the $30 minimum, it would take you 50 months, more than four years, to pay the balance. But you have to factor in interest as well. The average interest rate for a new card is 18.26%, and it’s 14.51% for existing cards.
If we have a $1,500 balance and pay $35 a month, an extra $5 over the minimum, and our interest rate is 15%, it would take 61 months, more than five years, to pay the card off. And we would pay $629 in interest. So that $1,500 balance took us five years to pay off and cost us $2,129 in total!
And that’s just using one card and a relatively moderate balance as an example. In truth, the average American has 2.35 credit cards and a total balance of $5,551.
You can see why it can seem nearly impossible to get out of debt! But don’t worry, it is possible, and we’ll show you how.
How to pay down debt fast
If you want to pay down debt fast, you have to make debt repayment your priority. It has to come before discretionary spending. Discretionary spending is money that isn’t budgeted for essential expenses like housing, utilities, groceries, insurance, etc. Paying off debt quickly means eliminating or at least drastically cutting back on things like:
Dining out, including work lunches and coffee
Entertainment including movies, concerts, vacations
New clothing and household items
Facials, manicures, hair coloring
You should also go through your necessary expenses and see where you can save money. Can you get a better deal on things like your auto or homeowners insurance, your cellphone, and internet plans? Shop around and see if you can get better rates from competing companies.
If you really want to pay down debt fast, you have to throw every extra dollar you can at it.
Paying down debt when money is tight
Having debt doesn’t necessarily mean you have a bad credit score. If your score is high enough, you may be able to get a debt consolidation loan with a lower interest rate than your credit cards. This loan can be used to pay off your credit cards. If your loan rate is lower than the card rates, you’ll save money.
If we used the same $1,500 debt from above but got a personal loan with an interest rate of 5.95%, much lower than the rate on our card, we would have a $29 monthly payment, a term of five years, and would pay just $237.86 in interest, a savings of $391.14!
The snowball and stacking debt payoff strategies
There are two well-known debt payoff strategies, the snowball method, and the stacking method. This is how they work:
Snowball method: List out all of your debts in order of dollar amount, lowest to highest. Pay the minimum plus every extra dollar you can find at the first debt on the list while paying just the minimums on the rest. Once the first debt is paid, you take the money you were paying on it and use it to pay off the next debt on the list. Continue this until all the debts are paid.
Stacking method: This method works the same as the snowball method. With one difference, you list and prioritize the debts according to interest rate, highest to lowest, rather than by dollar amount.
The stacking method will save you the most money because you’re paying off the highest interest balances first, and it’s the interest that makes debt expensive. But snowballing can provide psychological rewards that can give you the momentum to keep going because, in some cases, people have relatively small debts at the top of the list, and it’s satisfying to pay off a debt entirely.
Upwardli is here to help!
We know how stressful debt can be, and we’re here to help. At Upwardli, you can find financial service providers that can help you tackle debt quickly so you can move on to other financial goals.
