Five Steps to Eliminating Debt
Getting rid of debt takes hard work, willpower, and determination, but with the right mindset, it is achievable. We’ve outlined five steps you can take to start crushing debt today. If you want additional information, SCU members have access to free articles, calculators, worksheets and more through GreenPath!
Step 1: Choosing the right method
There are two main approaches toward eliminating debt:
- The snowball method, popularized by financial guru Dave Ramsey, involves paying off your debt with the smallest balance first and then moving to the next-smallest, until all debts have been paid off.
- The avalanche method involves getting rid of the debt that has the highest interest rate first and then moving on to the debt with the second-highest rate until all debts have been paid off.
Each method has its advantages, with the snowball method placing a heavier emphasis on achieving results at a faster pace, which then motivates the debt-crusher to keep going, and the avalanche method, focusing more on actual numbers and generally saving the borrower money in overall interest paid on their debts. There’s no right approach, so you can choose whichever method appeals to you more or is best for your unique financial situation.
Step 2: Consider a debt consolidation loan
If you’re bogged down by several high-interest debts and you find it difficult to manage them all, you may want to consider consolidating your debts into one low-interest loan. A personal loan from SCU Credit Union can provide you with the funds you need to pay off your bills and leave you with a single, low-interest payment to make each month.
Step 3: Build an emergency fund
As you work toward pulling yourself out of debt, it’s important to take preventative measures to ensure you won’t find yourself in a similar situation down the road. One of the best ways you can do this is by building an emergency fund. Ideally, this should hold enough funds to cover your living expenses for three to six months. Start small, setting aside whatever you can in a special savings account each month, and adding the occasional windfall, like a work bonus or tax return, to build up your funds even more.
Step 4: Reframe your money mindset
Sometimes, for example when there’s a medical emergency or another unexpected or expensive life event, a consumer can get caught under a mountain of debt through no fault of their own. More often though, there is a wrong mindset regarding spending that may lead a consumer directly into a debt trap. As you work on paying off your debts, take some time to determine what may have gotten you into the situation in the first place. Are you consistently spending above your means? Is there a way you can boost your salary or significantly cut down on expenses? Lifestyle changes won’t be easy but living debt-free makes it all worthwhile.
Step 5: Be mindful of the plastic
Credit cards are an important component of financial health, and they can be the gateway to large, low-interest loans. However, when you’re working to free yourself from debt, it’s important to use your card (or cards) responsibly. You can set automatic credit card payments on your recurring monthly bills, but only do this if you know you will pay off the charge in full before the bill is due.
Eliminating debt can take months, or even years, but there’s no better feeling than having a debt-free life. Best of luck on your journey toward financial freedom!
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