Americans are some of the worst savers in the world. We spend pretty much everything we make (and sometimes more!)
This epidemic is largely due to the incessant marketing of debt to individuals from the moment they become an adult, making debt repayment incredibly difficult.
I remember during the first few weeks as a freshman in college seeing tables of free t-shirts available to anyone who signed up for a credit card.
Most people just wanted the t-shirt and thought of the credit card as a bonus.
They didn’t realize the gravitas of the decision they were making and how it could impact them for years going forward.
True story: a friend of mine got his first credit card this way and said he didn’t realize he had to pay the money back!
Some people will laugh at that, but others had similar experiences. The lack of financial education and marketing of debt based products in the form of credit cards, student, and auto loans make young adults prime suspects to become debt slaves.
Unfortunately, most people only realize how difficult it is to repay the debt they’ve agreed to once it’s too late to do something about it. Regardless of how you got into debt or how much you owe, there are strong mental and financial benefits to paying off your debts.
In this article we’ll talk about how to start paying back your debt.
Take Account of Your Situation
As with any new endeavor, understanding your starting and ending points will speed up how fast you reach your goal. As it relates to your debt you will benefit by getting a clear understanding of your accounts.
Begin by gathering as much information as possible about any debt that is owed. Using a spreadsheet, you should document the following information:
- Monthly payment amount
- Payment due dates
- Annual Interest Owed (APR)
- Total balance outstanding
- Special terms (balloon payments, change in interest rates, etc.)
Getting this information into a spreadsheet or word document helps you build a better visual understanding of what your obligations are and what priority they take.
This information will be used to help you prioritize your repayment schedule, as you’ll see below.
Finally, it’s helpful to keep track of this information so that you can determine if any of the interest you pay is tax deductible.
For instance, you may qualify to deduct up to $2,500 of your Student Loan interest. This may seem like a small amount, however any bit helps.
Get a clear understanding of what debts you owe and on what terms.
Print this document once you have it complete and put it up in your closet or some place you’ll see it daily.
With this information in hand now we can start to outline how you’ll pay back your debts.
Build a Repayment Plan
Repaying your student loan or credit card debt can be difficult to stomach because you often feel like you’re getting nothing in return. This prompts people to avoid repaying their debts which results in additional interest, penalties, and a worse credit score.
Building a repayment plan will help you focus your efforts to get out of debt as quick as possible. Your debt repayment plan is your path forward to financial freedom. It will help you budget accordingly and also serve as a source of strength when you feel hopeless.
It’s helpful to remember that most debt obligations require you to pay interest before principal. So, during the first few years of repayment the bulk of your payment is going to the company as profit instead of to reducing your debt. However, as you’ll see below, there are some ways to shrink your repayment period.
Begin by documenting the monthly payment amount and putting a reminder of the due date on your calendar. Next, arrange for an automatic payment to take place with your bank.
Once you’ve covered your minimum repayment amounts you’ll want to decide which debt you should repay first with the extra income you’ll earn by following the steps below.
As a rule of thumb you want to repay the debt that has the highest interest rate first. For most people this is their credit card debt.
However, if you’re in a situation where you’ve taken a payday loan, then that should be your priority.
In order to pay down your debt faster you’ll need to make payments greater than the minimum amount owed. You can do this easily by making an extra payment each year by simply paying one half of your original payment every two weeks.
For instance, if your monthly payment is due on the 4th each month you can pay ½ of the payment on the 18th and the rest on the 4th. Doing so will help you reduce the amount of interest that accrues each period and effectively help you make 13 payments per year.
You can also speed up how fast you repay debt by consolidating accounts or refinancing. You’ll want to do some additional research before choosing to do either as there are benefits and drawbacks (namely for student loans.)
Build your repayment plan to get better control over your finances and a clear understanding of the path to debt freedom.
Once you’ve done so, it’s time to increase your income so that you can supercharge your debt payments.
Earn More Income
Most people would like to have more income, but aren’t willing to put in the work to get it.
Since you’re reading this article I’m going to assume that’s not you.
Below, I’ve outlined a few ideas for you to increase your income:
1. Virtual Tutoring
Why not share your knowledge with others at your convenience?
As a virtual tutor you can earn $10/hour+ from the convenience of your home.
Sites like indeed.com have a host of different tutoring gigs available.
This is a great way to generate some extra income while helping others that were once in your shoes.
Note: you can earn a higher hourly rate for different skills like Python or exam training.
2. Translation Services
If you’re fluent in a second language, or aspiring to be you may be able to generate extra income by translating papers and other documents into English or a second language.
Cantonese and Spanish speakers can make $15 – $24 per hour on the phone with opportunities like this.
3. Freelance Gigs
There’s an old saying that you never work a day in your life if you do the things you’re passionate about.
Today, you can literally get paid to do the one task you enjoy the most.
Check out http://freelancer.com to start marketing yourself for the task(s) that you enjoy most.
Doing any of the above can help you generate extra income in a convenient way.
This additional income can be used to accelerate your repayment plan.
You may also be able to get additional tax breaks by creating your own business if you’re working as a 1099 employee.
While selling and servicing debt-based products are Trillion dollar industries, you don’t have to be a cog in the machine much longer.
Take action today by implementing the three steps listed above.
Have you had success with debt repayment in the past? What was the most beneficial thing you did to help you get there?