Six Steps on to Pay Off Consumer Debt
People call me because they are literally drowning in consumer debt. Once you start accumulating debt, it’s extremely difficult to pay it off. And without a plan, it typically continues to increase, taking larger and larger bites out of your monthly budget. No matter how you ended up in debt, you are probably frustrated and seeking a solution.
This article will be most useful for anyone who has had recent changes in their lives that has caused your consumer debt to rise. It will be less helpful if you have a tendency to cycle into debt, then repay only to get into debt again. If your issue is cyclical, I would recommend learning more about how financial coaching will help address why you cycle in and out of debt.
A Few Assumptions
Whenever I work with a client who wants to pay off their credit card debt, we first assess their personal situation. A critical component is that you must have resources to pay off your debt. This means a source of ongoing income, cash from supportive relatives and friends, or extra income from a side job.
Also, it’s important that you don’t add more to your credit card debt. Meaning, if you charge any new purchases during the month, that amount is completely paid off every month.
Step 1 – Confront the Issue Head-On
Take a deep breath and open all the mail (snail and electronic). Stop hiding your head like an ostrich. I have had clients bring piles of unopened mail. They are afraid to find out how bad their situation has become. You can’t fix anything unless you know what you are up against.
Step 2 – Organize
Congratulations on opening all of your mail. Now it’s time to list all of the details in an organized fashion. You can set up your own spreadsheet, use this highly recommended free one, or a sheet of paper. List the name of the credit card, the total outstanding balance, interest rate, minimum payment due, due date.
Be sure to total all of your monthly minimum payments. This is the minimum you must include in your monthly budget.
Step 3 – Decide on the Order You Will Pay Off Your Debt
After you have organized your debt, you can more easily decide on which one you will pay off first, which one will be second and so on. There are three variations that you can consider.
- Highest interest rate first and the rest in descending order.
- Best for those who are mathematically inclined, since this will result in the least amount of interest paid.
- Smallest balance first and the remaining in ascending order.
- This is great for anyone who has a lot of cards. It has a feeling of accomplishment as you pay off each card.
- In order of annoyance.
- Many people are annoyed that they took out the last one or two cards when things were getting out of control. I suggest tackling these first because it will help you feel better. Then choose either one of the above.
Step 4 – Find Extra Money to Pay Off the Balances
This can be more difficult than Step 1. Track or write down all of your spending, paying particular attention to miscellaneous expenses, small debt card charges, cash withdrawals, and any automatic charges to your credit cards. This step may require you to hire a professional or a trusted relative or friend who can be unbiased in helping you find the leaks in your spending. You may need to give up or temporarily suspend some expenses. However, I do not recommend sacrificing all your fun activities.
Consider finding additional sources of income such as a second job or starting a side hustle. (To be clear, I am not suggesting becoming an Uber or Lyft driver.) If the timing is right, ask for a raise at work. You may have things that you no longer want or need which you can sell.
The goal is to find extra money so you can pay more than the monthly minimum balance due.
Step 5 – Begin Paying off the Debt
Pay the minimum payment on all your debt, except for the first on your list. That one you will pay the minimum plus the extra found in the step above. After this first debt is paid off, add that same amount you have been paying to the next debt plus the minimum due. This means your payments will become larger and larger thus accelerating paying off your debt.
Step 6 – Open an Emergency or a Rainy-Day Fund
Put aside money while paying off debt. This may sound counterintuitive because you may feel you should put all your extra resources towards paying off your debt. However, you must be prepared for the next emergency so that your payback plan is not thrown off-track. I recommend putting a minimum of $750 – $1,000 into a separate bank account. While paying off your debt, automatically put money into this account.
In Summary
Paying off outstanding debt can be a challenge. If this is the first time you have accumulated consumer debt, then making a plan of action is one giant step towards paying it off. If you think this is a cycle, then you not only need a plan of action but need help in understanding why you are accumulating debt. This may be best addressed by seeking financial therapy.
Have you paid off consumer debt in the past? Do you have any encouraging comments or suggestions?