Debt sucks. Most people have it, but no one likes to talk about it.
Many people believe that by ignoring it and making the minimum monthly payments, that they will eventually get out of debt and start living the life they want to live.
Some debt is considered less bad, such as a mortgage. But all debt uses up your monthly cash and throws money away on interest.
Unfortunately, debt is a trap. It holds you down and prevents you from doing the things that you dream of doing, such as traveling, retiring early, or investing.
Paying debts off is one of the most important things you can do to reclaim your life, your finances, and your time. Wondering why debt payments are terrible, and why paying off debt loans is one of the best decisions you’ll ever make?
Keep reading to learn all about debt pay down, and how to do it the fastest way possible.
Paying Debts Off Is One of the Best Investments You Can Make
Most people would love to earn passive income: money that hits your bank account every month without you having to go to work and earn that money.
While there are many ways to earn passive income, it all comes down to one concept: investment. Whatever you invest in, be it real estate, stocks, cryptocurrency, or something else, the more money you can invest, the more you can make in passive income.
Invest enough money over the course of a few years, and you can end up retiring early or working fewer hours at your job. This allows you to spend time doing what you want to do, rather than working in order to pay your bills.
One of the first questions that aspiring investors ask, however, is if they should invest before paying off debt, or if they need to pay off debt first.
The answer? It really depends on the interest rates you are paying. Let’s say you want to invest in the stock market, where your average return on investment will be around 10%.
If you have debt with a higher interest rate, it’s in your best interest to pay that off first. For example, a credit card with an interest rate of 17% or higher should be paid off as soon as possible.
Doing so would essentially earn you a 17% return on investment, which is more than you’d make in the stock market.
If you decide to invest before paying down high-interest debt, you are essentially wasting any returns you do earn. Pay off the debt first, and you’ll have more cash each month to invest.
Living Debt Free Gives You Options
Most Americans are living in piles of debt. It becomes normal and we get used to spending our hard-earned money on debt payments each month.
However, debt is not normal, nor should we ever get comfortable with it. Living with debt limits our options in life.
Paying off debt, however, increases our options. As mentioned earlier, without having to make monthly loan repayments, you could have much more cash flow each month.
You could choose to spend that extra money on things like hobbies, enriching your personal life. Or you could set up college savings accounts for your children.
Or you can start investing, in hopes that you could retire comfortably in the future. You could even retire early. With more money in your pockets, you might be able to afford a better house. Maybe you could move to an area that costs a bit more but provides more opportunities for professional development.
Basically, debt keeps you trapped in a vicious cycle. You are a slave to your lenders and your freedoms are limited. You need to get very mad at the fact that you have debt, so you can actually take steps to eliminate it forever.
Get a Better Credit Score
Having high loan balances is one of the key factors when determining your credit score. The more debt you have compared to your monthly income, the lower your credit score.
A low credit score also limits your options. With a low credit score, you won’t be able to get new loans for important things.
Maybe you need a better or bigger car, want to take out student loans for yourself or your kids, or want to buy a house instead of renting. Or maybe you’ll want to start your own business and will need to borrow your startup funds.
With a low score, you’ll either be denied a loan or have to pay a high interest rate in order to get one. With a higher score, however, lenders will trust you and reward you with the lowest interest rates.
Once again, paying off debt will improve your score, which will increase your options in life.
Create a Budget to Get Out of Debt
Are you convinced that debt is terrible and that you should get out of it as fast as possible? There are a few steps to take to begin this journey and ensure that you stick it out to the end.
First up, set a budget. You can’t manage your finances without a proper monthly budget. The most important thing to do is to live below your means. That means having extra cash in your bank account every month.
If you currently make $4,000 per month, and you spend the entire $4,000 on living expenses and loan repayments, then something needs to change. Do your best to live off of $3,500 per month, so that you have an extra $500 per month to pay off your debt faster.
What are the best ways to do this? You can stop eating out so frequently, and instead commit to cooking at home. You can cancel entertainment subscriptions like Netflix, Hulu, magazines, and other things that come out of your account monthly.
You could drive less and ride your bike more often, saving money on gas. This has the wonderful bonus of also improving your health and happiness. Maybe you can sell your car and buy a cheaper used car so you don’t have to make monthly auto loan payments.
You could perform an energy audit in your home, and make some simple changes to lower your utility bills.
Don’t look at it like you are limiting your lifestyle. Instead, look at this process like you are trying to set yourself free once and for all. In that light, any sacrifice you make will be worth it.
Choose a Payoff Strategy
Once you have a little extra cash flow each month, you can choose a debt payoff strategy. One of the most popular is the debt snowball method, popularized by financial guru Dave Ramsey.
With this method, you’ll make the minimum monthly payments on all of your loans. But you’ll devote your excess cash flow to the loan with the lowest balance. So if loan A had a balance of $3,000, loan B had a balance of $7,500, and loan C had a balance of $900, you would focus on loan C first.
Once the smallest loan is paid off, you focus all of your monthly cash flow on the next lowest loan. With each loan you pay off, you will have even more cash flow with which you can throw at the larger debts.
While this method is psychologically beneficial, as it provides quicker wins, it’s not necessarily the most cost-effective approach.
Others argue that you should focus on paying off your highest interest loan first, regardless of the balance on the loan. So if you had a credit card balance of $8,000 with a 17% interest rate, and student loans of $2,000 with a 4% interest rate, then you would focus first on the credit card.
Doing so would ultimately save you more money, as you would eliminate the higher interest rate sooner. Both methods work well. Just choose one and get started.
Consolidating Debt
One of the best ways to make the debt payoff process more manageable is with debt consolidation. By combining all of your debts, with different payment dates and interest rates, into one loan, you can more easily manage your finances and debt payments.
It means you are less likely to forget to make a monthly payment, incurring late fees and harming your credit score. And it makes your life much less stressful, which is priceless.
You can use a program such as the Plenti Debt Consolidation Loan to combine all of your monthly payments into a single, easy-to-manage loan.
Alternatively, you could consider refinancing loans. The interest rate on refinances or home equity loans is cheap, thanks to your home acting as collateral.
Make More Money
Once you have a debt payoff plan in place, the next thing to do is supercharge your progress. You can only save so much money each month. To speed up the debt payoff process, try earning more money, which is easier than ever before.
Depending on your job, you may be able to work overtime in order to increase your monthly income. Or, consider a side hustle, such as driving for a rideshare company, delivering groceries, or renting out spare rooms to full-time roommates or short-term travelers.
Sure, working extra isn’t ideal in the long term. But for a season, while you get out of debt, it might be one of the best decisions you ever make. And who knows? Maybe it will lead to a new career or a business of your own.
Staying Free From Debt
Nobody wants to be in debt. Unfortunately, few people make paying debts a priority. Along with a plan to get out for good, you also need a plan to stay out of debt forever.
For people who lack self-control, this might mean not having any credit cards. For others, it’s simply the process of saving money before making any big purchases. Delayed gratification is a powerful personal finance tool that can keep you free from the bondage of debt.
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