(5 Minute Read) – One of the greatest contributors to financial stress is debt. If you’re having a tough time financially, it can feel isolating, but the truth is 80% of Americans have consumer debt.
As part of America Saves Week, Unitus Community Credit Union is sharing tips to help you prioritize saving so you can reach your financial goals, including reducing your debt to save for the future.
The best way to relieve financial stress is to make a plan and work your way through it. But to make that plan, you’ll need to understand the type of debt you have, your best-case scenario to pay down your debt, and how to leverage your knowledge so that you can maintain or increase your credit score. When you reduce your debt, you save in the long run — on late fees, interest, and a higher credit score, which will lower interest rates.
Get a Clear View of Your Finances
While creating a spending and savings plan is essential, the true value in having a plan is clarity. When you know your exact income and expenses, it will become easier for you to decide how much to spend, if you can put more toward debt, what goes into savings, and whether to begin making investments. Your spending and savings plan will also highlight areas that need attention.
For example, is your grocery allocation adequate? Are all of your subscriptions and recurring monthly expenses still necessary, or can any be canceled? Knowing where all of your money is going can help you build financial confidence. It can also help you identify where you can afford to reduce your debt and begin building wealth.
After you establish this clear view of your finances, you can use tools within digital or mobile banking to set up a budget and to establish your spending goals.
Work With What You Have
When you’re paying down your debt, you must commit to not adding to it. This step may seem intuitive, but there are circumstances where the urge to just “charge it” may arise. Many “Buy Now, Pay Later” options are becoming increasingly popular. Though it may feel like it is not, options like Klarna, Afterpay, and Affirm are debt and should be treated as such.
As you work to pay off your credit cards, here’s a word of advice: do not close your credit cards! Closing your credit card accounts may reduce your credit score, as the “age” of your credit factors into your FICO score. By keeping your card open with a $0 balance, you’ll have a longer credit history and a larger amount of available credit. The only time you may want to consider canceling a card is if it has pricey annual fees.
Increase Your Income
If you can, consider increasing your income temporarily, allowing you to put more money towards your debt. This will allow you to pay down your debt faster. There are so many options to get a quick cash injection or additional income in today’s economy. Some ideas include selling items around your home that you no longer use, purging your closet and using sites like thredUp, leveraging a talent or skill you have like tutoring or singing to offer as a service, or taking advantage of the booming gig economy.
Paying It Off For Good Starts With a Decision
There are many strategies to use when working toward paying off your debt. The most popular strategies include the snowball method or the avalanche method. By deciding which method you want to use beforehand, you may reap the benefits of paying it off faster.
“Snowballing” your debt is a type of accelerated debt repayment plan. First, list all of your debts from the smallest balance to the largest balance. Next, make the minimum payment on all your debt except the smallest one. With your smallest debt, you will put as much money as you can toward the balance. Once the smallest debt is paid, take the amount you were putting toward that debt and apply it to the next smallest. With this method, interest rates are not the focus.
With the “avalanche” method, you will still make the minimum payments on every source of debt, but you apply the remaining funds toward the debt with the highest interest rate. By paying off the debt with the highest interest rate first, you reduce the overall amount of interest you pay.
Making extra payments allows you to pay off your loans more quickly when paying toward installment loans, like your car payment. Just be sure to specify that any additional funds outside of your monthly payment go toward the principal. Before you begin making extra payments to installment loans, check the terms of your loan to determine whether additional fees or prepayment penalties may apply.
Regardless of how you decide to reduce your debt, you can take the America Saves Pledge and choose “reduce debt” as your savings goal. America Saves will send you email and text reminders, along with resources and tips to keep you on track towards paying down your debt.
Don’t forget, your Unitus membership comes with free financial counseling where you can make a plan to reduce debt.
Tomorrow, we conclude our America Saves Week series by walking you through how to save as a family! It’s never too early to start building strong financial habits.