Paying off your debt – 5 strategies to do it quicker and easier

The coronavirus pandemic has dramatically impacted the average American’s finances, both positively and negatively. Though many men and women were able to reduce their credit card debt in 2020, many others still struggle under the weight of substantial debt from student loans, credit cards and mortgages. For example, the average elderly household is carrying anywhere between $31,000 and $86,000 of overall debt due to these three financial burdens.

3 WAYS TO PAY OFF DEBT IN RETIREMENT

There are many tactics you can use to tackle your debt, including these strategies that could potentially help you achieve this goal faster and easier:

1. Have a plan
2. Address credit cards
3. Debt consolidation
4. Stop frivolous spending
5. Find another source of income

1. Have a plan

Having a well-thought-out plan of action to tackle your debt is key to achieving this goal responsibly. One way you can conveniently manage all of your debts is to create a debt spreadsheet, laying out each debt, minimum payment, interest rates and due dates.

Another strategy you could consider implementing is the 50/30/20 budget rule: allocate your after-tax income to 50% living expenses, 30% discretionary expenses and 20% to savings.

2. Address credit cards

If high credit card balances are your primary source of debt, you should try to limit or completely stop using your credit cards. Interest rates can substantially inflate your balance, especially if you open a new credit card account with a temporary 0% APY and do not pay down your balance before the new interest rate is assessed. With the average credit card APR around 16%, even one month’s interest fees may be sizeable. Once you limit your reliance on your credit card, you can put the would-be interest rate charges into your savings and improve your credit score at the same time.

DEBT SNOWBALL METHOD VS. DEBT AVALANCHE: WHAT'S THE DIFFERENCE?

3. Debt consolidation

Debt consolidation involves combining your credit card or loan debts into a single balance. Utilizing a balance transfer credit card or debt consolidation loan has many advantages, including simplifying your monthly payments into a single one and potentially providing you with a lower interest rate. Debt consolidation is different than a debt settlement, which is an attempt to negotiate down your existing debt with creditors. This is a riskier option that won’t guarantee your debt will be reduced and you could actually end up paying more than your original balance if your debt cannot be settled.

HOW TO GET A BALANCE TRANSFER CREDIT CARD

4. Stop frivolous spending

Never underestimate the savings potential from simply cutting costs. From making coffee and eating meals at home to limiting impulse purchases and canceling underused subscriptions, any small sums you can save could be put towards paying down your debt.

5. Find another source of income

The old metaphor "time is money" may help you pay down your debt. If you have the time available, a "side hustle," such as a part-time job or freelancing role, could help you increase your income. Simply earning $50 by working one extra day per week equates to an extra $2,600 in a single year.

SHOULD I USE A PERSONAL LOAN TO CONSOLIDATE DEBT?

Final thoughts

Debt can feel overwhelming but it can be responsibly managed by taking action. Creating and following a debt recovery plan, which may include strategies like cutting out frivolous expenses or debt consolidation, can help you quickly pay down your balance. Opening a high-yield savings account is one way to maximize your interest-earning potential, which can then be used to pay off your debt faster. Keep in mind that the FDIC has reported that the national average savings account only earns 0.04% APY, whereas the average high-yield account earns substantially more.

HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.