If you’re like most Americans, you have a substantial amount of debt. Unfortunately, accruing debt is all too easy in modern society, which means that it’s incredibly difficult for some people to get on top of their money and take back control.
However, just because it’s challenging doesn’t mean it’s impossible. As long as you’re willing to fight the good fight and make some significant changes to your lifestyle, you can learn how to dominate debt.
Today we want to share some of the secrets to getting your debt under control so that it doesn’t overwhelm you or take over your life.
By the Numbers: Debt in the US
One reason why debt can feel so overwhelming is that you might think that you’re alone in your struggle. However, when you look at the data, it illustrates that massive debt inflation is an issue endemic to the modern experience. Let’s break down a few key statistics.
Overall, consumer debt is close to $14 trillion for the US. This debt is categorized into a few different types.
- Mortgages account for about $9.15 trillion
- Car loans are another $1.65 trillion
- Students loans are about the same, rising to $1.44 trillion in 2018
- Credit card debt is actually the lowest, accounting for $829 billion ($0.8 trillion)
Looking at these numbers, we can get a better sense of how much debt is shared by the total population. Most Americans have multiple forms of debt that they’re paying off. So, if you have fewer payments than what we’ve listed here, you can consider yourself better off than some.
Now let’s take things to the individual level. It doesn’t necessarily help to see how much debt everyone is in when that won’t impact how you dominate your debt. Since most people have fixed car or home loans, let’s see how credit card debt influences people’s lives.
- Most credit card holders have more than three cards
- The average credit card debt per household is over $8,000
- More than 189 million Americans have at least one credit card
Where you live can also influence your debt cycle, as the cost of living can squeeze you out of your paycheck much faster, forcing you to borrow more. For example, California is ranked fourth for total debt per capita, with the average person owing more than $10,000. By comparison, Michigan (despite its high unemployment and middling economy) has an average of just over $6,000 per person.
While we’re not suggesting that you move to another state to dominate your debt, it’s worth paying attention to how your surroundings can influence your financial health. If rent is too high, consider subletting to a friend. If your car payments are eating up too much of your income, see if you can switch to something more economical.
Now that we’ve gotten an idea of how debt can loom over everyone, let’s see how you can take charge of yours.
Step One: Figure Out How Much You Owe
When talking about debt, it can be kind of a nebulous number. Part of the reason for this is that you have different kinds of debt, which manifest themselves as various monthly payments. Your car, your credit cards, student loans - all of this is debt that you’re repaying.
If you’re trying to figure out how to dominate debt, then you need to determine the total value of it. It’s all too easy to continue to add more when you’re not quite sure how much you owe at any given time. If necessary, contact your lenders to get an accurate number and confront the beast. It may seem like a mountain at first, but you can get over it with the right plan in place.
The other side of this is to calculate how much you’re paying each month. Add up all of the various monthly payments you’re making. Ideally, debt repayment should be less than 20 percent of your total income. If it’s higher, then you really need to get a handle on it so that you stop adding more debt.
That being said, most banks consider 36 percent to be the cap. If you’re hovering around there, you are about average. However, if your debt repayment is more than 40 percent of your total income, it’s time to make some significant and potentially drastic changes.
Step Two: Consolidate Your Debt (As Much As Possible)
Paying off three credit cards can make it much harder to control your debt, mainly because they each have a minimum payment. Instead, it’s usually better to consolidate your debt into one monthly payment, as long as you can get a lower interest rate.
Typically speaking, having money on a credit card is going to cost way more in the long run, so you may want to get a personal loan instead. As long as the interest is lower than your cards, you’ll wind up saving money overall. Depending on your credit rating and the amount you owe, this move may make dominating your debt that much easier.
That being said, if you have a poor credit rating, obtaining a personal loan can be much harder than it looks. However, there are alternative resources, such as peer-to-peer lending sites that may have more flexibility than a bank.
What you also have to remember is that you only want to consolidate consumer debt like credit cards. Not only will it be easier to get a loan to cover that amount (instead of adding your car loan to the mix), but you can continue building your credit by maintaining your car and mortgage payments.
One thing to keep in mind is that you have two separate credit scores - one for credit cards and loans, and one for auto. If you have been paying your car loan diligently over time, you will likely have a much better credit score than you think. Having a higher rating can give you some additional flexibility with the lender, which may enable you to refinance your loan and get a lower monthly payment.
Step Three: Cut Down on Spending
One way to ensure that you will pay off your debt sooner rather than later is to stop adding to it. If you’re still eating out all the time or buying things you don’t need, your debt will continue to spiral out of control.
Sit down and balance your income versus your expenses. Include debt repayment as one of your bills so that you don’t forget about it (also, be sure to include savings as well). Whatever is left is your spending money, so be sure to stick to that.
Budgeting can be tricky, but there are a lot of tools and apps out there these days. Also, don’t feel like you have to get it right immediately - it may take a few months to get your spending under control.
Earlier, we mentioned that where you live can impact your financial situation more than you realize. Now is the time to take stock of what’s most important to you so that you can make some significant decisions.
If dominating your debt is a priority, you need to cut down on your bills as much as possible. Here are a few tips for getting your budget just right.
It’s easy to lose track of where your money is going, particularly if you spend a lot on little things. Ten dollars here, $20 there - it all adds up. Create a spreadsheet (or write in a ledger) and categorize all of your spending. For example, food, gas, utilities, clothing, etc.
Be sure to keep track for a few months. Look at your debit and credit card statements from the last two or three months and write down where your money was going. Overall, breaking it all down into numbers can help you stay focused.
Start With Small Changes
Dominating your debt may take a few years to complete, so don’t assume that you have to sell all of your belongings and live in a yurt to get a handle on it. Also, making such drastic changes to your life can cause other problems, so take baby steps at first.
Look at any subscriptions you have - which ones can you lose? Which ones are most important to you? Think about how often you use a particular subscription, and decide whether or not to keep it. Continue going through everything until you’ve cut out all unnecessary recurring bills.
It’s easy to look at your budget and say things like, “I can live on $50 a week for food,” or “I can start walking everywhere to save on gas.” However, in many cases, you may be biting off more than you can chew.
We suggest looking at where you want your spending to be (i.e., no more than $300 per month on food) and see how easy it is to stick to it. Try it for a few months and compare your actual spending to what you hoped for. If you’re consistently hitting a different number (i.e., $400 per month), then make that your goal.
As long as it’s less than what you’ve been doing (this is why tracking previous months is crucial), you’re making progress.
Step Four: Stick to Your Budget and Your Payments
Coming up with a plan is one thing - following through on it is another. Once you’ve consolidated your debt, now is the time to make sure that you’re maintaining a sustainable balance of spending, saving, and debt repayment. Here are a few tips to keep you on track.
Pay Yourself First
Saving is just as crucial as paying off debt. All too often, you will wind up adding to your total because of an unexpected expense that you don’t have money for. When calculating your budget, see how much you can (and want to save) each month. Even if it’s just $100, that’s better than nothing.
Whenever you get paid, put money away for savings before doing anything else. Most people save with whatever is left, but that’s a mistake. Pay your bills with whatever is left out of savings instead. Remember, you can always pull that money out if you really need it, but if you treat it like it’s not there, it will force you to stick to your budget more closely.
Pay Off Smaller Debt
Let’s look at an example: you owe $20,000 on your car, you have $15,000 left on your student loans, and your credit card debt is about $10,000. Ideally, you should focus on paying off the smallest amount first while maintaining minimum payments on everything else.
Once that smaller debt is paid off, don’t remove the total from your overall debt repayment. So, if you were paying $300 for your credit card, $200 on your student loan, and $350 on your car, that’s a total of $850 going toward debt repayment. Once your credit card balance is zero, put that $300 towards the next smallest amount, which in this case would be your student loans.
What you can also do is take a portion of that repayment and put it into savings. So, in this case, take $100 for savings and add $200 to your student loan so that you’re paying $450 each month. This process will ensure you pay things off faster.
Bottom Line: Be Diligent and Persevere
When figuring how to dominate debt, it’s easy to get overwhelmed. However, with time, dedication, and perseverance, you can make it happen. While life can sometimes cause you to backslide, take stock of any progress you’re making. For example, your credit card debt may fluctuate over six months, but your car loan is steadily going down at the same time.
Overall, remember that any progress is fantastic, and let it fuel you to continue on your path towards a debt-free future.
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This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.