Did you know that the average American has a personal debt of $38,000? According to CNBC, the $38,000 national average debt does not include mortgages. The national average in 2018 was $37,000, and the increase by $1,000 is an indication that debt management is still a challenge to millions of people in the USA. In addition, 20% of all people in the USA spend 50-100% of all income on repaying debts. However, paying off debt is possible, and some people have repaid all their personal debt using the following strategies.
Is a good credit score a ticket to amass personal debt?
Every person in the USA dreams of a good credit score. A good credit score (in a developed economy like the USA) gives you unlimited access to funds — since financial institutions can trust you. In most cases, a good score is also ideal in negotiating lower interest rates with financial institutions. However, pundits point out that high credit scores should not be a ticket to amass huge personal debt — especially in acquiring things you might not need in the near future. The primary purpose of a good credit score is to help you as an American in accessing funds when you need them most at competitive interest rates.
Therefore, the primary motivation of paying off your personal debt should not be about getting a higher credit score — but living a financially fulfilling life. In this case, personal liability includes all short-term obligations and if available — your students debt. With less debt, it is possible to have a definite plan for your disposable income and to have a systematic procedure on how to invest is not farfetched. Pundits also point out that with a higher credit score and less personal debt, it is possible to have a definite plan for your financial life.
What do you need before paying off your debts?
- Define your “Why”
Defining the reason why you want to pay off your personal debt is an ideal place to start your journey. The success of the repaying journey depends on your motivation. Although most people want to achieve a financial status where they can borrow more money, the main goal of repaying the debt should be regaining financial freedom. Getting a better credit score must be part of the reasons why you want to repay all your debt and not the only reason. Finally, defining the reason why you wish to pay off your debt is important after you have finished the payment journey. Pundits point out that paying your debt should not be part of a vicious cycle — but the start of a new financial life.
- Plan and budget your repayment plan
After understanding the reason why you want to repay your debts, the next critical stage in this process is — planning. In most cases, repayment processes fail because people do not have a clear roadmap on what to expect. Experts point out that having the willpower to repay your debt is not enough, but committing yourself to a plan is an essential step towards a debt free life. When planning and budgeting for a repayment plan, you should consider the following factors. First, you should create a repayment plan, which reflects your income. Second, any repayment plan must have a definite period, but the timeframe should be flexible.
- Create an emergency fund
Although repaying all your debts is one-step to financial freedom, the process does not answer the critical questions. For example, most people borrow and accumulate debts because of personal emergencies. During the repayment process, there is no guarantee that you will not have emergencies. However, creating an emergency fund is a game changer in addressing the elephant in the room — the unplanned emergencies. There are different criteria people use to gauge how much they should save in an emergency fund. The only universal rule in creating an emergency fund is ensuring that the amount in an emergency fund is unavailable for other expenditures — apart from emergencies.
- Adopt a minimalist approach to finances
Minimalism is arguably one of the most published lifestyles, probably because of its interpretation to life and choices. When preparing to repay your debts, it is vital to view your finances from a minimalist perspective. For example, you are supposed to spend your money on the necessities. In the world where the advertising industry is heavily funded, succumbing from the pressure is easy. However, before buying anything, you are supposed to ask some critical questions and view your potential purchase from a futuristic perspective. It is, however, important to understand that the lifestyle is not against spending — but excessive spending.
Tactics you should consider when paying off your debts
- Snowball Method
This technique is ideal when you have multiple debts but different amounts of liabilities. The scope of this repayment option follows the following guideline. First, you pay the minimum (but equal) amount to every debt. Second, for the remaining money, you start by paying off the smallest liability in full. The main goal of paying off the lowest liability is to ensure that you have fewer liabilities as possible. After paying off the first debt, you replicate the same approach in the subsequent payments — depending on when you receive funds.
This method is a game changer in debt repayment in the following two ways. First, snowball is the only technique in the repayment process that is progressive in nature. Snowball method helps you to tick off your debts progressively — from the small to bigger debts. Financial experts believe that the method creates a mental picture that it is possible to pay off all your debts. Second, the snowball method is the only technique that is ideal when paying smaller premiums. In most cases, debts are in thousands, and the figures are not attractive to look at, especially when starting the repayment journey. However, small progress makes the repayment journey a marathon, as opposed to splinting.
- Debt stacking method
The debt stacking method uses the same philosophy as the snowball technique, but in this case, you start paying off the debts with the highest interests. Like the previous approach, the first step is depositing a minimum amount on all the accounts. The minimum amount, in this case, depends on the debt amount and more importantly — how long you want to repay your debts. After depositing the minimum amount in all the accounts, debt-stacking method dictates another round of repayments — but first to the debt with the highest interest rate. The main reason why you should repay debt with a higher debt percentage is to avoid an accumulation of higher compound interests.
The debt stacking method is ideal in the following ways. First, it is the only payment option with less accumulated interest. Second, the debt stacking method is the only payment option that has the ability to improve your credit score, even with monthly minimum payments.
In conclusion, paying off debts and living a financially happy life is one of the greatest tests to personal discipline. The temptation of borrowing and using credit cards after paying off your debts is unmatched. In a country such as the USA where paying debts on time is an opportunity to get more debts — because of high credit score — staying with less debt requires more than paying debts in time or following the above techniques of paying debts. Fortunately, with a better understanding of money and financial obligations, making the best decisions as far as money is concerned is not farfetched. Therefore, paying off your debts and living with minimal liability is a game changer.