If you find yourself struggling with debt, you're not alone.
According to the Quarterly Report on Household Debt and Credit, at the end of 2023 household debt in the U.S. was $17.5 trillion, with credit card balances at $1.13 trillion. Yes, you read that right: trillion.
One big problem is that debt comes with interest. "Credit cards often have outrageously high interest rates and consumer debt tends to have high variable interest rates," explained Meghan Vanderlugt, CPWA®, Senior Wealth Advisor with Innovia Wealth in Grand Rapids. When you add interest to your principal payment, your debt totals can skyrocket.
Ready to ditch high interest rates and the financial anxiety that can accompany debt? Here are eight fundamentals to help you devise a successful strategy:
1. Emergency Fund First. "Before doing anything else, I suggest saving to create an emergency fund equal to three – six months' worth of expenses," Vanderlugt said. "Things happen and you need that cushion to be prepared."
2. Face Facts. It can be helpful to create a detailed list of how much you owe and to whom. Include the type of debt (credit card, auto loan, student loan, etc.); the lender; your current balance; your interest rate; and the payment that's due each month.
3. Budget Reality Check. Next, take a good hard look at your income and expenses. "Be honest with yourself about your spending," suggested Vanderlugt. "Cut your extraneous expenses, then use the excess cash to pay down your debt."
4. Create Your Strategic Plan. Once you have a clear picture of your financial landscape, choose your repayment approach.
With the debt avalanche method, you pay off your highest-interest debt first. "From a pure math standpoint," said Vanderlugt, "this will likely get you out of debt the fastest."
With the debt snowball method, you pay off your smallest debt first, regardless of the interest rate. This can be helpful when you like to see progress quickly. When one loan is paid off, you pay off the next smallest balance, creating a "snowball" effect of wiping out your debt.
With both strategies, you make the minimum payments on your other loans.
4B. Go a Different Route. You might consider debt consolidation and refinancing, which is when you combine several outstanding loans into one new loan, with one monthly payment. Some options are a credit card balance transfer, a debt consolidation loan, or, possibly, a home equity loan. Consolidation often comes with fees, however, and it's not guaranteed to have a lower interest rate. Do your research and double check the fine print before making this decision.
5. Get it Done. When you find yourself with a little "extra" money, either because your expenses were lower or you received a bonus, financial gift, or tax refund, resist the temptation to splurge. Instead, look at that money as a windfall for your loan repayment.
6. Boost Your Income. Sell (or re-sell) goods on Facebook Marketplace, take on a side hustle, like pet-sitting, rideshare driving, or shopping for others; ask for a raise (if warranted—do your research); or consider a career or job change and put that money towards your repayment.
Also think about your paychecks. If you're paid bi-weekly, you get 26 paychecks in a year (instead of 24). You may be able to apply all or most of those two "extra" paychecks to your debt repayment.
7. Take the "Free" Money! "If your employer offers a company retirement plan with a match, contribute at least as much as they match, because that's free money," Vanderlugt suggested. Furthermore, that money comes out pre-tax, so your paycheck is reduced by a lower dollar amount than the total that goes into your retirement fund.
8. Invest for the future: Once you've reduced your debt, it's time to invest. As mentioned above, if your employer offers a retirement account, talk to your HR department and start there. If not, look at a bank or brokerage firm that can help. "Set it up so you contribute on a systematic basis to a savings or investment account," said Vanderlugt. "Discipline is the key."
Digging out of debt can be daunting, but as you prioritize tackling your debt, you'll be on the road to gaining control over your finances, one step at a time, and experience the relief and confidence that comes from moving towards a more secure financial future.
Check out these online money management resources:
Kirsetin Morello is a Michigan-based author, speaker, writer, travel-lover, wife and grateful mom of three boys. Read more about her at www.KirsetinMorello.com.
This article originally appeared in the Jun/Jul '24 issue of West Michigan Woman.
