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With a potential recession looming, inflation at a 40-year high, and interest rates rising, if you have debt-especially revolving (credit card) debt, you will be facing higher interest rates on your debts and with those higher rates come higher payments.
Being in debt can be a stressful experience. But once you start looking for ways to get out of debt, you’ll find some peace of mind and start down the road to financial independence. If you’re ready to rid yourself of burdensome debt, here are some simple steps you can take to get started.
- Stop borrowing. If you’re serious about eliminating or reducing your debt, it’s essential that you only borrow in case of emergency. Make a commitment to stop charging everyday things like gas, groceries or clothes, and only buy what you can afford to purchase in cash.
- Determine your budget. Identify all your monthly expenses, and list them in order of necessity. You may find that many of your least necessary expenses can easily be eliminated, and the savings can be used for making higher payments on your debt.
- Choose a strategy. There are two common approaches to paying off debt. With the “snowball” method, you pay as much as you can toward the debt with the smallest balance, while making the minimum payment to your other debts. Once you pay off your lowest balance debt, repeat the process with the next lowest balance debt. With this method, you’ll pay off one of your debts sooner, which can provide an emotional boost and the motivation to continue the process of getting out of debt.
The other common approach to eliminating debt is known as the “avalanche” method. Here you begin with the debt with the highest interest rate, while paying the minimum payment on the rest of your debts. Once you pay off the debt with the highest interest, you move to the next one with the highest interest rate.
So which method is better? In terms of saving on the total amount of interest you pay; the avalanche method is the clear winner. However, if all your debts carry roughly the same interest rate, the difference can be minimal.
While creating a debt elimination strategy is relatively simple, it takes commitment and sacrifice to become debt free.
Provided by Ed Wettig, CFP, Cornerstone Financial Planning Group, which offers investment management, financial planning and retirement income strategies. Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Ave, Carpinteria, CA 93013, 800-874-6910. Cornerstone Financial Planning Group and PlanMember Securities Corporation are independently owned and operated. PlanMember is not responsible or liable for ancillary products or services offered by Cornerstone Financial Planning Group or this representative.
