The start of a new year is a time for self-improvement and setting goals. Many people yearn to live by the adage, “New year, new me.” But it’s tough to enact positive changes in your life when you’re carrying debt from one year to the next like heavy baggage.
Then again, it’s entirely possible to change your situation within a calendar year—provided you’re willing to take an honest look at your financial situation and even develop new habits. Wondering how to beat debt in 2018 and beyond? Consider these five tips for doing so.
Examine Your Financial Health
Before you make any lifestyle changes, you need to understand your own finances. How much debt do you have? What are your sources of debt? How much of your paycheck goes to paying down debt each month? Which categories—like food, transportation, housing, etc.—get most of your disposable income?
Something as simple as using a spreadsheet template will give you a comprehensive view of your finances. Although it’s daunting as first, commit to sitting down once per month or quarter and updating it with your latest figures. Over time, this habit will become second nature.
Consider Your 401(k)
Now, generally it’s wise to leave your 401(k) alone unless you’re upping your contribution. However, sometimes it’s a savvier move to cash out part of your retirement fund to pay off debt than it is to let it sit. For example, it’s beneficial to pay off loans with interest rates between18 and 20 percent—so high that it threatens to compound your existing debt.
However, consumers must be aware that there’s a penalty for withdrawing 401(k) funds early. Not only will you have to pay income tax on the money you remove, but you’ll have to pay a 10 percent penalty. This course of action is advisable only for people struggling with high interest rates.
Compare Debt Relief Strategies
There’s no one-size-fits-all approach to get out of debt. However, there are a number of strategies to consider, based on factors like credit score, amount/type of debt, timeline, etc.
For example, homeowners with high-interest debts may choose to refinance their mortgage in order to pay off their debts faster. Consumers looking to pay more than their minimum balances may pursue debt settlement by paying creditors through professional negotiators.
Long story short: Your circumstances ultimately dictate which path you choose, so do plenty of research up front.
Trim the Financial Fat
Paying the minimum amount due on your debt does stave off late fees. But it doesn’t eliminate your debt. In order to do that, you’ll need to pay more than the minimum—preferably as much as you can muster at any given time. So, it’s smart to start looking for areas in which you can save.
For example, consumers may not even realize they’ve enrolled in multiple entertainment streaming services and subscription packages over time. Do you have auto-pay set up for these and other non-utility bills? Taking a minimalist approach to monthly expenditures will help you re-allot more income to debt repayment while still allowing you to maintain your lifestyle.
Draft a Debt Repayment Strategy
All debt is not created equal. A strategic approach to paying it off will help you persevere. After all, the process is a marathon rather than a sprint. Paying off your large loans first can feel like a tiny drop in the bucket. That’s why some experts suggest using the debt snowball method.
Start by ordering your debts from smallest to largest. Then, proceed to pay off smaller debts more aggressively while paying the minimum balance on larger loans. You’ll get a psychological boost every time you close out a smaller debt, plus have more money over time to finally tackle your larger loans once and for all.
Utilizing a combination of these strategies could help consumers beat their debt in 2018 and beyond.