Tackling debt can be a painful topic that many associate with fear, guilt, and shame. The truth is that debt is a part of life for many American households, but it doesn’t have to be.
Take a look at some of the key findings from Northwestern Mutual’s 2019 Planning & Progress Study:
- U.S. adults have an average of $29,800 in personal debt (not counting mortgage debt).
- On average, over 34% of people’s monthly income goes toward paying off debt.
- 45% of Americans say debt makes them feel anxiety on at least a monthly basis.
The good news is the more you develop yourself and your financial plan, the less debt you will have.
Here are some common reasons why people go into debt: job loss, bad purchase decisions, shopping habits, or maybe you just haven’t been paying attention to your spending.
Whatever the reason, you are where you are. Debt is definitely an area where a lot of people could use a little help. Make it a learning lesson and break the pattern.
Below are a few suggestions of steps you can take to manage your debt:
- Take a stand for yourself and STOP accumulating debt. Cut up your credit cards, give them to a loved one, or put them in a place that is not easily accessible. I choose to keep only one credit card in my purse for emergencies – this helps me to stay disciplined.
- Take an honest analysis of your debt. Debts could include personal Loans, credit cards, student loans, home improvement loans, or outstanding balances for professional services. Make a list of each, including the creditor (who you owe money to), balance owed, interest rate, minimum payment, and any special terms associated with the debt. You may do this with an app on your phone, a notebook, journal, or computer. I use an excel spreadsheet program to help organize and simplify the decision-making process.
- Consider transferring high-interest-rate credit cards to a lower rate card or doing a consolidation loan. You may wish to consult your financial advisor to review terms prior to making any commitments.
- Call each creditor and ask them to lower the interest rate (if you have not done so already). Ask what balance transfer offers they have available for you. Write them down and consider working with your financial advisor to evaluate the offers.
- Determine what debt repayment method would work best for you. There are several methods available, but two common methods described by Bents Dulcio on Debt.org are the “snowball” and “avalanche” methods. Choose one that can help motivate you to keep paying down your debt and get you moving closer toward your goal.
- With the snowball method, you list debts from smallest to largest. Typically, you will pay more interest over the term of the repayment plan so this method is used for those who need a quick win to celebrate and keep them motivated. As you pay off creditors, apply the monthly payment you were giving to the previous creditor to the next creditor on your list. Once you build serious momentum you will soon look for ways to add to your snowball!
- With the avalanche method, you list debts in order of the highest interest rate first. Put the largest amount possible to the top creditor and pay only the minimum payment on all the rest. Once the top creditor is paid off, allocate the larger payment to the next creditor, including the minimum payment you are already making. Typically, this method will save you the most in interest payments and you will pay off the creditors faster.
Some people choose a custom repayment plan, which can be a combination of these two methods. That way they can pay off some small cards to celebrate and pay relatively less in interest over the term.
It feels empowering to create a debt repayment plan to help you become more aware of your debt, improve spending habits, and set “pay-off” priorities.
References and Further Reading
Northwestern Mutual. (2019). 2018 Planning & Progress Study
Bents Dulcio. (2019). What Is the Debt Avalanche?