Paying Down Debt

Knowing when and how to pay down debt, is a big question for many of us. Most of us have mortgages, credit cards, student loans, and more hanging over our heads. Of course paying down debt can be a very helpful thing to do, but we need to make sure we do it as effectively as possible to get the most benefit.

First, stop new debt! Cut up your credit cards, hold off on big purchases. This will keep you from making the problem worse. This can be difficult to be sure, but without it paying down some debt while getting more debt is just ludicrous.

After that, we need extra money each month to start paying down our debt. If we are spending all or most of our income every month, paying down debt will be impossible. Starting with a good budget, we can starting preparing for financial freedom. Depending on how quickly you want to get out of debt, and how much debt you have, you may need to consider a very aggressive budget. This can include eliminating all unnecessary expenses, such as gym memberships, eating out at restaurants, going to the movies, and more. The more aggressive you can be, the faster you can get back on track financially.

Once you have an appropriate budget in place, you should consider an emergency fund. This can help you when the unexpected happens: hospital bills, car accident, etc. You should try for at least $500-$1,000, depending on your situation, and enough to cover 1-2 months of expenses wouldn't hurt.

Even while you are getting all of this ready, you can start aggressively attacking your debt. make sure you know exactly how much you owe for each of your debts, and what the interest rate is for each debt. Credit cards are probably going to be your highest interest debts, and should be paid off first. If you have multiple cards, find the one with the lowest interest rate, and if you have a high enough limit, transfer the balance of your other cards to it. Call up your credit card company and ask them for a better rate, do some comparison shopping to see what other rates are out there, and push them to give you a better rate. This may not work in every case, but it is always worth trying.

The ideal case for paying down your debt it to pay off the highest interest rate debts first. This will save you the most in the long run and can get you out of debt the quickest. For some people though, paying off your debts with the smallest balance can be the most rewarding. This approach allows you to eliminate specific debts sooner, so they are no longer outstanding. This approach might take longer, but if you are the type of person that gets motivated by seeing some of those debts disappear, then it might actually be faster. What ever approach you take, just stick with it.

Every extra dollar and cent you can spare should go towards your debt. If you get a bonus at work, or a tax refund, or even $20 from grandma, put that money towards your debt. As soon as you have paid off one debt, immediately start on the next. As time goes on you may adjust to your budget and feel OK with it. If this starts to happen, then tighten you budget again. The more money you can put towards your debt the soon you will be free. This can also help you get on the road to building wealth. If you are used to living off less money while paying down your debt, if you continue that trend after paying off your debt, then you can immediately start saving and investing that money instead of just going back to spending all of your money again.

There are some debts that you may not want to pay off. Some debts with lower interest rates and/or tax advantages like mortgages and student loans you may consider not paying off immediately. For some people the psychological effect of being completely debt free can be amazing, and having all of your income at your disposal, instead of paying your debts, and also be pretty great. There is also something reassuring to own your home free and clear. But you may need to consider that investing that money may actually get you ahead sooner, than if you pay down those debts. The choice is a very personal one, and you will need to decide for yourself what makes the most sense for you.