Popular Strategies to Get Out of Debt
If you’re struggling with debt, you’re not alone. According to Experian, total consumer debt nationwide increased 5.4% in 2021 to a record $15.31 trillion, a $77 billion increase. In Texas, debt grew 4.2%, with the average Texans holding $84,744 in total debt. According to Pew Charitable Trusts, 80 percent of Americans carry some form of debt.
If you’re in debt, it might feel overwhelming, but you can follow the simple strategies in this article to become debt-free.
A Budget Is the First Step, An Emergency Fund Is the Second
Establishing a budget is the first step in any financial plan and is necessary to get out of debt efficiently. The second step is establishing an emergency fund for unforeseen expenses that life has a way of throwing at us. It’s crucial to keep a $1,000 emergency fund while you get out of debt so that you don’t need to take on additional debt if an unexpected expense arises.
Here are some benefits of establishing and following a budget to pay off your debt:
- Your budget will help you identify how much extra you can put towards your debt every month. We also recommend setting up auto-pay for these extra debt payments.
- A budget will help you understand where your money goes every month and help you identify spending leaks and where you can cut back.
- If the first draft of your budget doesn’t have enough to pay down your debt, it’s time to make some changes. Can you cancel some subscription services Can you limit your non-essential spending? Can you get a part-time job?
Once you’ve established your budget and emergency fund, it’s time to make an aggressive commitment to paying off your debt.
Once you’ve established your budget and emergency fund, it’s time to make an aggressive commitment to paying off your debt. Below are two of the most popular methodologies.
At Texell, we recommend, along with several experts, the debt snowball method to pay off your debt. In this method, you focus on making the largest payment possible toward the smallest debt while making your minimum payments on all your other debts. The debt snowball method reduces your debt by starting with the smallest balance. When your smallest balance debt is fully paid, you roll the money you were using to pay off this balance to the debt with the next lowest balance. You continue this until all debts are paid in full.
The debt avalanche method first reduces your debt by starting with the highest interest rate. From this point, the steps are the same. You focus your attention and any extra payment on the highest-rate debt while continuing to make your minimum payments on all your other debts. When your highest-rate debt is fully paid, you roll the money you used for that debt payment to the next highest-rate balance. You continue this until you’ve fully paid off all debts.
Which Is the Best Strategy?
The debt snowball and the debt avalanche methods are both effective strategies to get out of debt. Ask yourself: Which system will keep you motivated? And how will I change my habits to avoid ending up in the same position again? Ultimately, this is far more important than the choice between these two popular methods.
No matter what strategy you use to get out of debt, it won’t always be easy. Becoming debt-free is a journey, and the most important step is starting the process. Once you’ve started, stick to your budget and your chosen method of paying off debt. You can do it, and your future, debt-free self will be happy you did.
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