Break the debt cycle
Someone recently told me that they struggle with their finances because every time they pay off all their debt, it seems that they just end up with the same amount, or more, soon after.
If you have debt, does this resonate? This used to be true for me, too. I would pay off all my credit card debt, only to rack it up again by the next month. I could never really get a grasp on debt or have any extra money.
Then I discovered that that there is a strategy to paying off debt and staying out of it. A couple of weeks ago I wrote about cash flow, and that’s a big part of it. And, there’s also a strategy to how we repay debts.
So, if paying off your debt and living debt free is exciting to you, read on.
Where to begin?
Create debt lists. It can feel overwhelming to look at our debts. But this is where we start. Make a list of all your debts. Gather and review your credit report and ensure you’ve captured them all. Remove any judgment – this is just putting data on paper. Once you’ve written them all down, commit to not taking on more. This will be the final list. Once you’ve made the list, make two more lists. On one list, take the same debts, and order them from smallest balance to largest balance. On the next list, take the same debts and order them from highest interest rate to smallest interest rate. Now, you have three lists. The first list simply captures all your debts. The second orders them by amount and the final list orders them by interest rate.
Pick a payoff method.
Snowball: The snowball method relies on human behavior and momentum. Taking the second list you made, with the debts ordered by amount, you make the minimum payments on all your debts and then any extra money you have at the end of the month, you put towards the debt with the smallest balance. You continue doing this until you’ve paid off each debt. As you pay one off, that minimum payment becomes extra money you have at the end of the month which you can use to pay off the next smallest debt more quickly. This method builds momentum with quicker wins, which helps us continue the journey.
Avalanche: The avalanche method instructs you to order your debts by interest rate and pay the ones with the highest interest rate first. Just like the snowball method, you continue to pay the minimum payments on each debt and apply any extra income to the debt with the largest balance. The logic in this method is that you will pay less interest and therefore, less over time. This method requires more discipline because wins may occur more slowly.
Make it fun. Gamify paying off debt. Create a race for yourself. How quickly can you do it? How much extra cash will you have when it’s gone? How can you make it fun? How can you celebrate each milestone?
Have a realistic spending plan and understanding of your cash flow. To avoid relying on debt, make sure you have a solid, realistic spending plan and a keen awareness of your cashflow. If you use money to pay off debt that you are going to need in a few weeks, you will certainly rely on debt again. If you don’t have a little bit of savings before paying off your debt, create a cushion first.
If you've ever felt trapped in a cycle of paying off debt only to find yourself back where you started, know that you're not alone. I've been there, too. Discovering the power of strategic debt repayment methods was transformative. By creating clear debt lists and choosing a payoff method that aligns with our goals and behaviors, we can regain control of our finances. Turning the journey into a game, celebrating each milestone along the way, adds excitement and motivation to the process. And, crucially, coupling these strategies with a realistic spending plan and a deep understanding of our cash flow ensures that we stay on track towards lasting financial wellness.
If this is helpful to you, reply to this email let me know!