Rule number one. The best way to pay off debt is fast. Who wants to unnecessarily waste money on extra interest?
In most cases, debt starts out as insignificant. So much so, you tend to overlook or postpone paying the money you owe. A Spanish proverb runs like this:
“Debts are like children: the smaller they are the more noise they make.“
That noise is going to eventually catch up with you, overwhelm and cover all other aspects of your life. Consider the average 2015 American college graduate who leaves school with more than $35,000 in loans. Paying off debt has taken the role of an initiation path into adulthood.
No matter how much your finances have been knocked behind— whether it’s student loan debt, credit card debt, house loans, or something else – it’s important to face the facts and start your way on a future plan to shake yourself free of debt. It might require drastic measures and tight corners, but what is the alternative?
With annual rates of 20% or more compounded monthly, you can’t wish debt away. But you can pay it off. Here are some of the quickest and most efficient ways to get your financial footing back.
The Best Way to Pay Off Debt: Five Tried-and-True Methods
1. Pay more than the minimum payment
The finish line to a debt-strangled life is just ahead of you. Only you’re moving at an unnervingly slow speed. You need to break the habit of making only the minimum monthly payment, which is usually 2% to 3% of the outstanding balance.
Not to mention you’re playing into the hands of the bank. The longer it takes you to reach that finish line, the more you gasp for breath and pause on the way, the more interest they make.
Increase your debt repayments by double, even if you have to make a few sacrifices along the way. You could skip lunch at that fancy restaurant and buy a bagel instead, or watch that Saturday movie at home and forget the cinema this month. Haute cuisine doesn’t taste that good on an empty credit card anyway.
Bite the budget bullet and pay as much as you can each month. On the long run, the increased payments will save you thousands of dollars.
One piece of advice. Before you start on this strategy, make sure your bank doesn’t apply prepayment penalties.
2. Snowball Your Debt
Could this be the best way to pay off debt? Dave Ramsey, or America’s truest voice on money, as he advertises himself, vouches for its effectiveness. He calls this strategy the ‘debt snowball’.
He says it is based on psychology, not math. On a mathematical ground, it makes sense to pay off your debts starting with the one with the highest interest rate. The snowball method encourages people the best way to pay off debt is from the smallest to the largest balance.
Once the smallest is paid off, you can tick it off the debt list. This will give you a huge psychological boost, a vote of confidence on your part. It will let you know debt is not forever. Ultimately, it’s you who’s in control over the money you owe, and not vice-versa.
Over time, you’ll see your small balances melt away like snow in spring. As your debt decreases, it frees up more dollars to attack the larger loans.
3. Living on Bear Necessities
More stuff will not make you happier. Of course, it might be this anti-consumerist, ascetic statement doesn’t agree with you.
But if you allow debt to ruin your financial peace of mind, and you end up fearing the ever-incoming bills each month, where’s the fun in that? The best way to pay off debt is to embrace more modest life choices.
Learn how to live with a bare-bones budget. In other words, live within your means. At least, for as long as necessary to pay off the money you owe. Then, you can start accumulating new debt, if you feel compulsive about it.
You have to start by restraining your shopping excesses. Resist the marketers, the so-called promotions, the ‘extras’ like cable television, a night at the casino, a holiday in Europe.
You’ve entered bare-bones budget territory. No credit cards allowed. Cut them, put them in a safe and hurl that safe in the ocean, or just leave them in your wallet and practice your self-discipline.
Either way, you have to stick to your newfound, simple-means lifestyle. From now on, you’re living a hand-to-mouth existence, but at least it’s on your own terms, and not superimposed on you by your debts.
If it gets too gloomy without the happy hour budget, remember this is only temporary. If you feel your willpower slipping away and that new summer Gucci bag calling at you in your dreams, remember you are part of a very distinguished category of people. The 20% who are actually responsible with money.
Once you’re debt-free again, you can start adding discretionary spending back on your ‘favorite things to do’ list.
4. Speed up the Payoff Process
There’s no best way to pay off debt, but many paths lead that way. Working two jobs or putting a skill you have for sale are some of the tried-and-true methods.
Whether it’s mowing yards, walking dogs, writing or organizing, you can monetize your talents for some extra hard cash.
Sites such as Upwork.com or TaskRabbit.com can help you find something to suit your skills. Online money making has already built up its reputation, and not all the options there are empty sales pitches.
Almost hustle-free, you can rent out one of your rooms to travelers through Airbnb.com, or save on gas while on a trip to the seaside by picking up hitchhikers on blablacar.com. These are not get-rich schemes, but get debt-free alternatives you might want to try out.
Also, if time allows and you’re willing and able, consider getting a seasonal or part-time job. For example, summer brings the need for tour operators, landscapers or lifeguards.
5. Lower Your Interest Rates
“Interest on debts grows without rain”, says a Yiddish proverb. Banks and other financial institutions will never experience drought as long as they have interest on you.
Interest is a powerful weapon. It significantly increases the amount you need to pay back. More than often, we lose track of how much that is.
However, not a lot of people are aware of the fact that they can ask for lower interest rates on their credit cards, and even renegotiate the deal. Especially if their payment record is solid. Just ask to talk to a bank negotiator and state your case.
You can also pay off credit card fast by performing a balance transfer. It means you can move your credit card to another bank that will give you a better deal on your interest rates just to have you as their customer.
It’s a bait you’re biting on, but it might prove mutually beneficial. Just make sure you shop around before settling on one, banks come a dime a dozen. Also, don’t forget to read the fine print. Terms and conditions sometimes hide small traps that will trip on your way to that debt-free promised land.
For many, living paycheck to paycheck has already established itself as an inescapable reality. Ultimately, the best way to pay off debt is to admit being in debt is not a natural state-of-affairs. There will always be ways to get you out from the crushing weight of that mountain stack of monthly payments.