The new year is the perfect time to reset your finances. In fact, according to Pew Research, resolutions about money or finances are among the most common. However, as author Antoine de Saint-Exupery once said, “A goal without a plan is just a wish.” If paying down debt tops your list of financial goals this year, a debt repayment plan can help motivate and guide you along the way.
Capital Credit Union believes in empowering members to take control of their financial future. That’s why we have resources and tools to help jumpstart your debt repayment journey. Here are some strategies for managing debt and regaining your financial independence in the process.
Create a Budget
The first step to gaining control of your finances is knowing how much money you have coming in and going out each month. So, if you haven’t already, create a monthly budget. Calculate your monthly income after taxes, then deduct your monthly expenses. Include the minimum monthly payments for each of your debts.
Are you under budget? Great! Put any extra income toward your debt so that you can pay it down more quickly. Over budget instead? Look for ways to trim your monthly expenditures, such as canceling subscriptions you no longer use or skipping your daily trip to the coffee shop and instead making coffee at home.
Aim for an outgoing cash flow that is equal to or less than your income.
Consolidate Your Debt
Debt consolidation allows borrowers to combine multiple different debts under one loan with a single monthly payment for everything. This has a number of benefits, including reducing the chance of missed or late payments since you only have one payment to worry about each month. The potential to lower your interest rates is another advantage. Exchanging high credit card rates for lower personal loan or home equity loan rates, for example, can substantially reduce how much you pay over the life of the debt.
If your budget shows that you’re stretched too thin, consolidating multiple debts into one can also often lower your monthly payment, giving you some breathing room and helping you stay on track with your monthly payments. Want to see how much you could potentially save? Capital Credit Union has a debt consolidation calculator to help you crunch the numbers.
Simply plug in the debts you would like to consolidate, including their balances, interest rates, and minimum monthly payments. The calculator will tally up your current total monthly debt payments and then compare your current payment with your consolidated debt payment estimate.
You can even change the loan term on the calculator until you find a monthly payment that fits within your budget. There are several options, ranging from just a year up to 30 years. Our calculator is a great tool to evaluate whether debt consolidation could be the right option for you.
Select a Strategy for Repaying Debt
You can also choose to repay each of your debts separately. There are two popular approaches to this option—the debt snowball and the debt avalanche. It’s important to choose the strategy that you feel is best suited to your needs. Here’s a brief overview of each so you can decide which approach you’d like to take.
Debt Snowball
With the debt snowball method, you prioritize paying off your smallest debts first. While still making the minimum monthly payments on your higher debts, you allocate as much of your budget as you can to the lowest debt. Then, once you repay the smallest debt, you apply that monthly payment amount toward your next smallest debt. Each time you pay off a debt, you repeat that process. That monthly payment is applied to your next debt, and so on, until they’re all paid in full.
The idea with this strategy is that knocking out those smaller debts will energize and motivate you to keep going because you’re able to see and feel the progress (fewer total debt payments). If you’re someone who likes to celebrate the small wins, this could be the approach for you.
Debt Avalanche
While the focus of the debt snowball is on building momentum, the focus of the debt avalanche strategy is on saving the most money. With the debt avalanche, you prioritize debts with the highest interest rates.
Similar to the debt snowball, once your debt with the highest interest rate is paid off, you apply that monthly payment to your debt with the next highest interest rate. The goal of this strategy is to prioritize eliminating debts that charge the highest amount in interest in order to save the most money.
Which strategy works best for you will depend on your individual financial goals and behavior. If you’d like to maximize your savings over time, the debt avalanche method may work better. But if you’re someone who likes to see quick progress, it may be to your benefit to try the debt snowball plan.
Leverage Tools and Resources
To stay on track with your debt repayment plan, leverage tools and resources to help you chart the path ahead. For instance, it can sometimes be helpful to be able to see the light at the end of the tunnel, so to speak. Certain financial apps and calculators provide you with an estimate of when you’ll be debt-free based on your current rate of repayment. Many of these tools, like undebt.it and Debt Payoff Planner, have free or low-cost options.
You may also want to consider financial counseling or taking advantage of free financial courses and online resources. Capital Credit Union offers a personalized course playlist (Opens in a new Window) to help you get closer to achieving your financial goals. Simply answer a few questions, and we’ll provide the learning tools you need to get where you want to be financially.
You can even select your own playlist if there’s a particular financial area you would like to explore. We provide information on a range of topics, including homeownership, investing, and preparing for retirement.
As you embark on your financial journey, remember to keep your goal front and center: Visualize what life will be like once you’re debt-free. Then, take advantage of financial education opportunities to set yourself up for future financial success.
