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Before you can start the journey to paying off your debt, you need to know that you are not the only one with bad debt holding you back in life. NY Fed released the latest data on bad debt and it equates to $13.2 trillion consumer debt, which means every single American owes $40,000 in credit cards, loans, and mortgages.
These figures are demoralizing for someone who is willing to pay off their debts, however, there are many people who have successfully paid off their debts, which means escape is within reach.
Where to Begin?
One such person who has successfully paid off over $30,000 in personal loan and credit card debt is Marcus Garrett.
According to Garrett, who now talks about the personal crisis on the Paychecks & Balances podcast, says the first and foremost action to pay off debts is to formulate a plan. In the beginning, Garrett himself was lost in the beginning and had no idea how he got himself into so much debt until he did the math.
He came up with a plan, and that plan was to build a budget. Garrett’s strategy was to identify where his money was going, and by building a budget, he successfully alleviated overspending by keeping a watchful eye on his spending. The trick was to take a chunk out of his income and use it specifically to pay down his debt. So, the actual breakdown was to spend %50 on his needs, %30 on his wants, and the remaining to pay off his debt.
The most important part of making this plan work is trusting the process, sticking with the plan, and a lot of sacrifices even when things get tough.
Prioritize Credit Cards
If you are someone who is facing multiple debts, then your primary focus should be on credit cards, personal loans and any loan that has a high interest against it. Your top financial priority should be to pay off your credit card debt, and the founder of a financial advisory firm Stash Wealth, Priya Malani, stresses on the fact that credit card debtors should devote at least %20 of their income towards credit card debt.
Stash Wealth caters to millennials, who often struggle with their credit card debt. They keep their clients from investing when they have credit card debt because they believe the investment will not be viable with a credit card, and it will cost them more than they are apt to make.
Two Schools of Thought
When you have more than one debt to pay off, there are two schools of thought that allow you to prioritize payments. The first method is known as the “Snowball” method, that talks about applying your money to pay off the smallest balance first. The second method “Avalanche” entails that you go after the highest interest balances first. This way you can lower the amount of interest as you pay off other accounts.
The “Snowball” method may not make as much sense if your balances are quite similar. To makes, things clearer for yourself, use an online comparison tool that can evaluate your specific situation, and after acquiring that knowledge, you can easily decide which method to apply.
Simon Blanchard, a professor at Georgetown’s McDonough School argues in his recent study that people who were able to pay off their smallest balances first were able to get out of debt quicker as opposed to those who applied their money to pay off high-interest balances first. According to him, it motivated consumers to pay off their remaining debts and resorted to saving even more for the cause.
Sticking to the PlanGetting out of debt isn’t easy, and it requires a lot of discipline, which will ultimately lead you to a financially secured life and will keep you out of debt going forward. Building a budget is your best bet to manage your spending, which will ensure that you never get back into debt again.