How to Eliminate Debt
Most American households are in debt, including credit cards, mortgages, student loans, and other sources. Debt makes any purchases you make cost more in the long run and limits your ability to do other things in the future. Not all debt is bad, but reducing the debt you have can give you more options both now and later. Are you curious about what key strategies you can deploy to reduce your debt? Keep reading to learn about effective debt reduction strategies and solutions.
Before you begin to payoff existing debt, you should consider saving an emergency fund to provide long lasting financial stability. That advice often feels counterintuitive to people who feel burdened with debt, but having money in savings for a future unexpected expense can help keep you from racking up even more of that expensive debt down the line. A popular rule of thumb is between three- and six-months’ worth of expenses.
Make a budget, or a list of what items are essential and what you could do without. Once you know how much you have available each period, you can start prioritizing what’s most important. Find or make room in your budget; you may need to reduce your expenses or generate more income, so you’ll have extra money to put toward paying off your debt.
There are two basic strategies for paying off debt: pay the most toward the debt with the smallest balance or pay the most toward the debt with the highest interest rate. Pay the lowest balance first if you want to get quicker wins with paid-off balances. Pay the highest interest rate debt first if you want to save the most in interest over the long term. Paying down debt isn't always all about the numbers. Psychology is also at play. Looking at your situation, do you need a quick win sooner? Or will it feel better to attack the costliest debt first? Choose the strategy you're most likely to stick with over the long term.
We recommend you make at least the minimum payment on all debts first. Then when deciding which debts to pay extra on, focus on either the highest interest rate or lowest remaining balance debt. Keep in mind any promotional rates that will expire, as a much higher rate may be in effect after the promotional period ends. The type of debt, such as a mortgage or student loan, can also be a factor when deciding which debt to pay extra on. Other considerations such as tax implications or loan forgiveness may be in play.
Finally, consolidating debt could help you save on interest and pay it off faster. Debt consolidation typically involves taking out a new loan and using those proceeds to pay off existing debts. This could be a good strategy if you're looking to consolidate the number of payments you need to manage each month, potentially lower your overall interest rate and are able to pay off the debt faster as a result.
Source: https://www.usaa.com/inet/wc/advice-finances-how-to-pay-off-debt
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