If you are struggling with your finances, one of your top goals for the year is to pay off your debts.
The past year was like no other and it could have put you in a situation where you had to dig deep and use up a lot of credit or take out loans just to get by. While people were losing jobs left and right, debt payments were not being prioritized. Instead, people were simply trying to survive and get by with basic needs.
A lot of people suddenly had to rely heavily on their emergency fund’ or other forms of savings to get by. And these are the people who have savings to dip into. For those who lost their job and do not have any savings under their name, the logical thing to do was to use credit for daily expenses. If that was not possible, taking out loans was a necessary step to make sure all basic needs are covered.
If you had a challenging year and had to take out loans or max your credit to get by, you need to have a concrete repayment plan. You need to pay off your debts to help you get back on track. This is because too much debt can put your plans to a screeching halt. You will have a difficult time moving forward if you are deep in the red.
If you are not able to recover from your debt obligations, you might have to push your retirement date by a few years. CNBC already shares that most people are looking to retire when they reach 66 years old. Debt could also prevent you from saving up for that down payment on the house you have been wanting to buy for your family. This means you could start looking somewhere else for a new house or agree to a higher monthly payment on a house.
These are just some of the things you could be looking at if you are not able to take control of your debt payments this year. But there are a few things you can look at to help put some structure in your debt payments this year.
What do you owe
If you want to pay off your debts this year, you need to have a clear idea of what your debt accounts are. It is not enough to have a vague idea of how much they are or have a total for everything. If you want to pay them off, you need to know what they are. This means having a comprehensive list of all the debt accounts you are paying at present.
This means writing down not only what you are paying for every month. You need to include other important details as well. Put in the due date for each payment as well as the interest rate for each account. It will also help if you include lender details such as contact details for each of them. These pieces of information can help you make informed decisions later on.
There are a number of ways you can consolidate this list. The most traditional of which is using pen and paper and writing them down. You can also make a copy on your personal computer or even your smartphone. Putting this list on your smartphone provides you with information anytime you need it. Just be sure you keep it safe from being accessed by other people.
How much do you have
Now that you have a clear idea of what you need to pay every month, next comes the income. To pay off your debts, you need to make sure you have enough income coming in every month. This could be a tough one especially with the events of the past year. On top of this, one of the reasons you are in debt could be attributed to the pandemic last year.
Regardless of your situation, the fact remains that you need to pay down your debts and your income is a big part of that. List down what you are making every month and check if that is enough to cover all your monthly payments. It’s one less thing to worry about if you have enough every month. But when you are coming up short every month, then you need to fill in that gap.
The first thing to consider is putting in more hours at work to get a bigger paycheck at the month’s end. You can also look for a side hustle you can do in your spare time. You can choose something close to home so you can do it on your way home from your day job. It is also possible to spend time on an income-positive hobby. This is a great way to earn extra money while doing something you love.
Pay off your debts with a repayment strategy
One thing that can help you pay down debt obligations for the year is having a repayment strategy to help you focus and gain direction. If you want to do it on your own, there are a few repayment strategies you can choose from. One is the avalanche method where you focus on the account with the highest interest rate.
This helps you save interest payments in the future. The Snowball method is where you pay down the smallest amount first. It gives you the mental win to move forward with your repayment. There are instances where you might already be considering bankruptcy. But look into debt settlement and identify a reliable company you can work with.
Debt consolidation is another strategy to consider when paying down your debts. This is where you combine your payments under one account. This helps you manage and monitor payments easily reducing the risk of missing a payment. If you are able to use a 0% card or be approved for a lower rate if you are consolidating using a new loan, you can also save money in the process.
Stick to your plan but be flexible when needed
Pay off your debts this year by sticking to your repayment plan. Remember that coming up with a plan and following that plan are two completely different things. You can have a great plan on how to pay off debt obligations but if you do not follow that plan, then you will not move forward. Debt payment needs discipline and perseverance in order to see results.
While you repay your debts, you need to make sure that you have an updated and comprehensive household budget. The reason for this is that it will help you adjust along the way. If you have some extra money at the end of the month, you will see it in your budget and be able to allocate that towards your payment strategy. The important thing is to have access to your financial information whenever you need it to make informed decisions.
What can go wrong?
As you aim to pay off your debts, things might not always go the way you plan them out to be. Here are a few of the things you need to be ready for as you focus on debt payment.
Once you start making payments, you might burn out and find that retail therapy as an escape. Marketwatch shares that some people are impulsive buyers as a coping mechanism. As a result, you end up with unplanned and completely unnecessary purchases. What is worse, you could be using the same card you are trying to pay off. When you are in the process of paying off accounts, make sure you think purchases through. One buying frenzy can undo months of hard work.
Small debt increments
Debt can creep back up to you without you noticing it. You might start to add small installment payments every now and then thinking it would not make a big difference. But at the end of the month, you could be surprised at how much they total to. Remember that they will eventually add up to a significant amount if you do not monitor the expenses on your budget.
It can be tough to pay off your debts considering the past year was very challenging but it is doable. Once you do, you will be on track to reaching your goals.