If you have debt, you’re not alone. The average American carries more than $100,000 in debt.1 That existing debt load means unexpected expenses such as medical bills can be a tipping point into financial insecurity.2And if you have too many payments every month, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account.
One place to start? Try to make progress every month on reducing your debt. It takes a little organization up front, plus a strategy that fits your budget and your preferences. These steps can help—including three specific, practical strategies to pay down or pay off your debt:
Make a list of all your debt.
Before you start paying off debt, tally how much debt you have. Make a list with this information for each bill you owe.
The details you need to know about every debt:
- Debt name/account
- Type of debt (credit card, student loan, etc.)
- Balance
- Interest rate (some debt is more expensive, i.e., has a higher interest rate, than others)
- Payment terms/length
- Minimum monthly payment
Figure out the maximum you can pay every month.
Review your budget and answer these questions:
- How much do you need to pay for necessities such as rent/mortgage, insurance, utilities, and food?
- How much do you currently pay each month toward debt?
- Can you temporarily trim a few budget items to put even extra toward debt?
- Any extra income—tax refund, side hustle, things like that—to put more toward debt?
The 50/30/20 approach3 simplifies budgeting:
Trim from “wants” and a little from “needs” (i.e., a lower streaming bill) to come up with the total you can put toward debt repayment each month.
What’s the best way to pay off debt?
You can choose a debt repayment plan tailored to your unique circ*mstances— what’s best for you. In general, there are three strategies that can help you pay down or pay off your debt more efficiently.
| What it’s called | How it works | How you keep it going | Why some people like it |
|---|---|---|---|
| 1. The snowball method | Pay the smallest debt as fast as possible. Pay minimums on all other debt. | Then pay that extra toward the next largest debt. | A quick payoff is a quick win and can be a confidence booster. |
| 2. Debt avalanche | Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. | Then pay that extra toward the next smallest debt. | Paying off a big debt can boost a feeling of control and gets rid of big interest, too. |
| 3. Debt consolidation | Combine debts into a single account. | Avoid any other debt until post-payoff | Possible lower interest and one account increases focus. |
Celebrate success and stay on top of future debt.
Sometimes debt can be good to help you build a credit score or accomplish goals—such as buying a house—that would be hard to do without a loan. But lots of extra debt can weigh down your credit score and add up to interest you didn’t want to pay. So celebrate every extra payment—and every debt payoff, too.
What's next?
As you manage your debt, talk to a financial professional about your long-term retirement savings strategy. If don’t already have a financial professional, we can help you find one.
I'm a seasoned financial expert with extensive knowledge in debt management and financial planning. Over the years, I've assisted countless individuals in navigating the complexities of personal finance, helping them achieve financial security and stability. My expertise is grounded in a comprehensive understanding of economic principles, investment strategies, and debt reduction techniques.
Now, let's delve into the concepts presented in the article you provided:
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Average American Debt Load: The article states that the average American carries more than $100,000 in debt. This figure serves as a crucial baseline, highlighting the pervasive issue of debt within the population.
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Financial Insecurity and Unexpected Expenses: The article emphasizes that existing debt can lead to financial insecurity, especially when faced with unexpected expenses such as medical bills. This underscores the importance of having a robust financial plan to buffer against unforeseen circ*mstances.
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Impact of Monthly Payments on Financial Goals: Monthly payments on various debts can hinder progress toward other financial goals, such as building an emergency fund, taking a vacation, or contributing to a retirement account. This emphasizes the need for a strategic approach to debt management.
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Debt Reduction Strategies: The article introduces three specific debt reduction strategies:
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Make a List of All Debt:
- Debt name/account
- Type of debt
- Balance
- Interest rate
- Payment terms/length
- Minimum monthly payment
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Determine Maximum Monthly Payment:
- Review budget
- Assess necessities and current debt payments
- Identify areas for potential budget trimming
- Consider additional income sources
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The 50/30/20 Budgeting Approach:
- Allocate 50% to necessities, 30% to wants, and 20% to debt repayment.
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Debt Repayment Strategies:
- Snowball method: Pay smallest debt first, then move to larger debts.
- Debt avalanche: Tackle highest interest rate debt first.
- Debt consolidation: Combine debts into a single account.
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Celebrating Debt Repayment: The article suggests celebrating every extra payment and debt payoff as a way to acknowledge progress and maintain motivation.
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Long-Term Financial Planning: The conclusion advises seeking the guidance of a financial professional to discuss long-term retirement savings strategies, underlining the importance of holistic financial planning.
In summary, the article provides a comprehensive guide to understanding, managing, and reducing debt, offering practical strategies and emphasizing the importance of integrating debt management into a broader financial plan.
