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3 Steps for Eliminating Debt That Are Actually Sustainable

Your Finances
|
October 5, 2020

There are now 44.7 million student loan borrows in America. With over $1.59 trillion dollars in student loan debt alone, it’s no secret that debt is a universal issue. Here are three sustainable steps for eliminating debt.

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One afternoon, I was taking a stroll with a friend of mine. It was one of those picturesque sunny afternoons; one with an incredible, light breeze to keep us cool. 

Yet, on this beautiful summery day, our topic of conversation was anything but light; instead, we were chatting about one of the most crushing epidemics that most young people face today: Debt.

The Department of Education reports that borrows with $10,000-$20,000 can expect to be paying those loans for 15 years. An extra $20,000 of debt means additional 5 years of payments. Alongside that, a study conducted by the National Association of Realtors shows that the median age of first-time homebuyers was 33 years old. 

The fact of the matter is, our current system requires the average individual to be in debt from the time they graduate college to the time they pay off their first home. That’s a period of almost 41 years on average.

So, if we choose to take part in this system, how can we sustainably pay our debts? We’ll need a map, a plan, and some resources.

1. Start with your budget.

If you don’t already have one, you need to create a budget.

Your budget is your map for paying off debt; it gives you a holistic view of your entire financial health and can show you unexpected holes in where you’re overspending or where you may have left money on the table. 

By referencing your budget (at least on a monthly basis), you’ll be able to get an incredible picture of your relationship with money. Without it, eliminating debt can seem like an insurmountable obstacle.

All debt has a required minimum payment. You can easily use your budget to find how that minimum payment fits in with the rest of your expenses. For example, do you have leftover money after taking care of the rest of your expenses? Or are you strapped for cash each month and living paycheck to paycheck?

Photo by Chris Biron on Unsplash

2. Decide on your strategy.

Once you’ve got a map, you need a plan. When it comes to paying off debt, there are two big strategies: the Avalanche Method and the Debt Snowball. You can decide which method will work for you!

The Avalanche Method

When it comes to the Avalanche Method, your goal will be to tackle your debt based on which balance has the highest interest rate first, while maintaining minimum payments on all other outstanding debts.

Imagine you have the following:

$15,000 in credit card debt with an interest rate of 17.89%

$10,000 in student loans with an interest rate of 4.9%

The Avalanche Method dictates that you should pay the balance with the highest amount of interest first. In this case, you’ll tackle the $10,000 of credit card debt first. This way, you actually end up paying a lower amount of interest overall and can pay off your debt much faster.

The Avalanche method is especially helpful if you can spare a large amount of extra cash each month. If you’re strapped for cash, it may not be the best method.

The Debt Snowball

The Debt Snowball method was popularized by financial guru Dave Ramsey. This method suggests that you build momentum (like a snowball rolling down a snowy hill) by conquering your smallest debt balance first, regardless of the interest rate. Then, you roll that payment from the smallest debt balance into the next, and so on! 

Imagine you have the following:

$600 in credit card debt with an interest rate of 17.89%

$10,000 from a car loan with an interest rate of 6%

$20,000 in student loans with an interest rate of 4.9%

With this method, you’ll tackle the $600 debt first to build momentum for later payments. Since our brains are predisposed to desiring achievement, you’re using your own psychology to your advantage by paying down the smallest debt first; seeing a quick payoff is encouraging!

Dave Ramsey's Debt Snowball
Infographic via Moolanomy.

3. If you have extra, put it to good use.

If you’re fortunate enough to not be living paycheck to paycheck, your top priority should be getting out of debt. Whether you have a side hustle, receive a bonus at work, or just find $20 in the couch cushions, you’ll need to commit to putting your resources to good use. 

Severe debt is like a hemorrhaging wound; your body is required to put a stop to the nonessential functions and redirect all resources to stop the bleeding. 

It’s the same for your budget; all non-essential spending should be redirected to paying down that balance. If you’re able to make more than the minimum payments, your wallet will thank you. Unfortunately, this isn’t the case for everyone. Many people struggle to keep up with their minimum payments and end up in default. 

So, count yourself lucky if you’re able to make your dollar stretch, and celebrate the small wins. After all, no one wants to spend more than half of their lifetime losing money. 

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