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On this episode of How To Money, Matt and Joel provide a valuable step-by-step guide to creating a debt payoff plan, as well as some tips and tricks to add in to accelerate that plan once you’ve gotten a good start on it. Many Americans are tens of thousands of dollars in debt, and while some debt is “good debt” (for example, a mortgage on your home), some debt is simply dragging its victims further into a mire. But there’s always hope. Matt and Joel caution against a debt consolidation service; often, you pay a huge fee upfront that you likely can’t really afford, only to have the company do very little for you. The good news is, most of what a debt consolidation service offers, you can do yourself. The first step is straightforward: List all your debt. Who do you owe, and how much? What are the interest rates and payment schedules? Now you can see which are your priorities, and which can be put off.
Next, pick a debt payoff strategy. There are a couple ways to do it. Many prefer the “debt avalanche” approach, which means picking your highest interest debt and trying to eliminate that one first. It’s a great approach because you save money on the interest you can accrue over time, but it can be very difficult to implement depending on how much money you have to spend on your debts every month. Many times you'll find yourself able to only pay the interest, but never paying down the principal, which is very discouraging. The “debt snowball” is another strategy: Pick your smallest debt and put all your effort into eliminating it, paying only the minimums on everything else. It takes longer, but it might be more manageable for your situation. And as you pay off debts, you’ll have more money to pay off the subsequent debts, accelerating you to the day when you have no debts at all.
It’s important to lay out your monthly income as well as your debt payments and other expenses and have a realistic picture of how much you can put toward your debt every month. If you don’t manage your own expectations with a reasonable timeline, you’ll feel discouraged and more likely to give up. “The best plan we can create is the plan we can stick to,” Joel says earnestly. There are lots of other debt payoff hacks, from simple things like calling your credit card company to ask for a lower interest rate to more complex ideas like finding an additional income stream; hear all these great “practical and tactical” tips to tackle your debt on How To Money.
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