When you are living paycheck to paycheck, it’s difficult to pay-down your debt. Discover strategies to help eliminate debt (quickly) on a fixed income.
Going into debt is relatively easy these days. From the lending companies practically at every corner to credit card offers showing up in the mail every single day, it’s no wonder getting into debt is so easy. You need credit to help with larger financed purchases down the road (e.g. mortgage), but you shouldn’t drown yourself in debt building up your credit. It can take years to pay off debt, so be careful when taking on debt while on a fixed income. Coming up with your own debt pay-off strategy is something we hope you will decide upon after reading our debt pay-off strategies.
For starters, it makes no sense to take on more debt while trying to eliminate debt. Unless of course you are a business leveraging through the use of debt. You must start by avoiding new debt when dealing with your own personal finances. Take your credit card out of your wallet so you won’t be tempted by any impulse purchases the next time you go out shopping for groceries. Instead use cash or a debit card with sufficient budgeted funds to make your weekly purchases (e.g. groceries). Designing a budget you are comfortable with will hopefully be a good starting point for avoiding costly impulse purchases that could put you into more debt.
Now it’s time to start listing all of your debts. This list should include all loans (e.g. student loans), credit cards, and any financed items. It’s important to know information about all of your debts, otherwise it’s going to be difficult eliminating your debt. Consider the following questions:
- What is the amount of your total outstanding debt?
- How much do you pay each month?
- How many months do you have left to pay your debt? (you can figure this out based on your monthly payments and total debt bill)
- What is the interest rate for each of your debts?
Now that you know and understand your debts, it’s time to start creating a debt elimination strategy that works for you. How comfortable you are with having debt and how quickly you want to eliminate your debt should be considered when choosing your debt elimination strategy. Here are several strategies to consider:
Interest Pay-Off Debt Strategy
If you are only paying off the interest amount you are being charged each month, you might never pay off the actual principal of the debt. Focus on your debts with the highest interest rate. Make a payment that is more than the interest amount so that you are starting to pay off the principal. This will reduce your future interest charges and will allow you to pay down your debt faster. Once you have one debt handled, move on to the next highest interest rate debt and pay that off at a higher amount each month. Typically your mortgage will have a lower interest rate than your credit cards, so you might consider this strategy when the focus is paying off your credit card debt quickly.
Keep in mind that some loans have a fixed interest rate that you pay-off during the length of the debt, thus paying these types of loans faster will do you no good as you still have to cover the interest amount established by your loan.
Minimum Pay-Off Debt Strategy
Simply paying off the minimum amount each month will eventually lead to you paying off the debt in full, but this strategy can take quite a long time. You will end up paying more in interest if you stick with this strategy. The key is to pay an amount more than the minimum to start reducing your debt quicker. You can start with smaller loan/debt amounts and when you are done paying that loan, use that monthly amount against your larger loans.
Largest Payment Pay-Off Debt Strategy
Focus on the debts that have the highest monthly payments and make an effort to pay these loans off first. Eventually this will reduce your monthly payment amounts, which can be used to pay-off other loans. Using this strategy will have an impact on your bank balance each month, so make sure you have budgeted for this payment strategy. However, once this large payment is eliminated or reduced, you will start seeing a positive effect on your monthly bank balance.
These three strategies are just some of the ways those on a fixed income or living paycheck to paycheck can eliminate debt quickly.
For those that have been successful at paying off debts, what are some of the debt elimination strategies you employed? Share your tips and advice with our readers in the comments section below.