[Seven Minute Read]
In part one of this blog series on overcoming debt, we discussed how to craft the right budget to fit where you want to go. Now that you have a list together of your current expenses, it’s time to start planning for the future and creating a plan to transform your goals into possibilities. If you haven’t yet established a budget that actively works toward your goals, the following ideas and methods for reducing debt may be helpful in getting you back on the right track.
Negotiate Your Payments
Some bills can’t be avoided but knowing your budget can help you identify opportunities to reduce expenses that are costing you more than they have to. Review your current expenses and consider the last time you negotiated your payment for each item. Chances are, you’ve likely been putting off saving yourself money because of the hassle it would take to shop and compare prices or set up new plans. While reducing one of your bills by $25 may not seem like a big difference right away, those savings add up over time and multiply with each bill you can reduce.
Start easy by selecting one payment you haven’t negotiated in a while and take 15 minutes to talk with your provider or research resources available to help you reduce what you are spending. Insurance for instance can be a quick win and we’re making it faster than ever to compare quotes between over 40 of the most reliable carriers. We’ve helped our members save an average of $680 a year on their auto insurance policies alone, not to mention the extra savings we can help to find on home, renters, and other policy types, all at no cost to compare. Connecting with an expert who has helped others like you before can help save you time and money when reevaluating your payments. Never be afraid to seek assistance or advice if you aren’t sure how to begin.
If your credit score has gone up since you last negotiated your loan payments, you may also want to consider refinancing your debts for a lower interest rate so that more of your payment is going toward your principle balance instead of being wasted on unnecessary interest. It is always best to talk personally with your Financial Advocate first to ensure that you are in good standing to qualify for a loan before pulling credit.
Celebrate Good Financial Habits
While trimming payments on your regular bills can be a great start in freeing up extra funds from month to month, chances are you may have to evaluate other expenditures that are draining your accounts such as paying for entertainment, eating out, or shopping. Although cutting back on these expenses may seem like a sacrifice at first, keep in mind that by reducing these costs you are actually freeing yourself to spend your money where you want it to go rather than wondering where it has gone to by the end of each month.
Consider starting small by cancelling a monthly subscription that you rarely use. Is there perhaps a streaming service you pay for that you don’t frequently take advantage of or a magazine that gets delivered each month which isn’t being read? If there is no penalty to cancel, these quick wins can make a big impact in keeping money from sneaking out of your wallet without much discomfort in your daily life.
Be sure to celebrate your financial successes as you go, big or small. This will keep your momentum going and help to remind you that you are investing in a larger goal with each challenge you overcome. Avoid setting yourself up for failure by trying to change all your habits overnight and instead focus on one new positive financial habit at a time. Challenge yourself to spend $15 less this week on eating out, shopping, or other unnecessary expenses. Reduce frivolous spending by instituting a 2-day rule before purchasing items that are not necessities to ensure that you still feel that you need it.
Managing Multiple Card Payments With Varying Balances
For those who have debt distributed between several cards with varying balances, it can be difficult to feel like you are making progressing in paying off your debt. In this case, you are likely paying fairly sizeable payments to interest each month for each card which can quickly become a drain on your budget. This can make it difficult to make the larger payments you need to really reduce your debt at a faster pace. One tried and true technique for overcoming this obstacle is to pay the minimum required balance on all your loan payments except your credit card with the smallest balance. Put as much as you can each month toward paying that card off. Once that is paid off, if your payment was $30 then you now have an extra $30 each month to add to the payment you make on your next smallest card. Continue repeating this process so that with each card you pay off, you build the amount you can pay toward the next one.
Managing Fewer Debts With Higher Balances
If you are managing a fewer number of debts but still feel overwhelmed in how quickly you are making process in paying off what you owe, you may consider prioritizing your highest interest loan to be paid off first. This would likely be a credit card if you have one. Naturally, your higher interest loans are costing you more to manage your debt than lower interest loans are since a higher percentage of your payment is going toward interest instead of your principle balance. Like the method above, pay the minimum required balance on all loans except your highest interest payment which will receive as much as you can pay each month until it is paid in full. Then move the amount you were paying on that loan to tackle your next highest interest payment. In time, as your highest interest loans are paid, you will see that more and more of your payments are going toward reducing your principle balances.
Consolidating Credit Card Debt
Another way to manage credit card debt is using another loan to consolidate your current balances. This can be effective in helping to lower debts that are trapped in high interest credit cards but should be a route that is taken only when you have a plan in place. Juggling debt between loans to simply catch a break from making payments can be destructive to your credit score and could cost you more in the long run if not careful. Be cautious about the plans you set and ensure that you can stick to them. Transferring high interest balances to lower interest loans like a personal loan can help to put more of your payment toward your principle balance but you run the risk of falling deeper into debt if you begin building back more credit card balances before paying down what you already consolidated. Additionally, your available credit compared to the balances you are carrying on your revolving loans like credit cards makes up a large impact on your credit score so if you do consolidate credit card debt, be sure not to close your cards as this can have a negative impact on your credit score.
Beware The Zero Percent Offer
One question we receive frequently is in regard to the infamous 0% offer for transferring your balance to another financial institution for a certain period of time, traditionally between 12 to 18 months. For most people, the offer may seem too good to be true and in most cases that’s absolutely correct. While the offer may seem tempting, be particularly careful to read through all the terms and conditions so you fully understand your obligation to receive the offer. Many require a transfer fee which can become pricy on larger balances and outweigh the savings you might see from the lower interest rate. Additionally, some require that you pay the interest you skipped if your balance is not paid in full by the time the offer ends. You could also potentially harm your credit by taking on the additional loan.
Before accepting any credit offers, it is always best to first review all your options with your Financial Advocate or another trusted expert to ensure that the path you're taking is the right one for you. To get in contact with one of our Financial Advocates, give us a call at 303.279.6414 or request a call back online here.