Carrying around excess debt can put a serious damper on your life plans. Not all debt is bad, but we highly recommend managing debt carefully. Good debt is when you borrow money to pay for things that will increase in value or generate income over time, like paying for college or buying a home.
Conversely, bad debt is borrowing money to pay for things that decrease in value pretty much as soon as you buy them. Examples here include clothes, the latest tech gadgets, and that 85-inch widescreen you've been wanting.
There's nothing wrong with swiping your credit card to pay for that screaming TV deal. We get it. Who doesn't like earning rewards on their purchases? However, if you can't afford to pay off that balance quickly, that screaming deal just turned into extra interest charges.
Here's our four-step debt recovery plan to help you get on the road to living life on your terms.
- Establish a realistic budget
- Spend wisely
- Prioritize your debt payments
- Save for the unexpected
Establish a realistic budget
We know. Groan! Nevertheless, trust us; it always comes back to the budget. To reduce debt, you have to live within your means and carve out some extra dough to put towards that debt. Your One Nevada membership comes with tools to help. Explore our 5-minute, Create a Budget guide available through Cent$ible, our free financial knowledge program.
When you're ready to set your budget, log in to your One Nevada account online and look for our KeepTrack service. With KeepTrack, you can connect all of your bank or credit union accounts and see all of your transactions in one location. Once you connect your accounts, just tap ‘Budget" and KeepTrack can help you build a budget based on your transaction history.
There are many tactics available to determine how much you should spend on a monthly basis. One simple way is to follow the 50-30-20 rule whereby you spend 50% of your after tax income on needs, 30% on wants, and 20% on savings or debts. The less you spend on wants and the more you spend on savings or debts the better.
Spending wisely is about being disciplined with your money. Each of us has a "money personality" that plays a major role in how we manage and spend money. If you don't know yours, we recommend joining one of our upcoming, Psychology of Spending webinars. It'll help you understand how to recognize, monitor, and adjust your financial behaviors so that you spend wiser.
Prioritize Your Debt Repayments
We recommend two primary debt repayment strategies. Both are designed to repay debt as quickly as possible. Not sure which method is best for you? Complete our 5-minute, Debt Management guide for help.
- Avalanche Method. With the Avalanche Method, you pay the highest amount to a debt with the highest interest rate while making only the minimum payments on the rest of your debt. Once you pay off the highest interest rate debt, combine that payment amount with the minimum payment of the second highest debt, and apply it to the debt with the next highest interest rate. Continue that process until you repay all that bad debt.
- Snowball Method. With the Snowball Method, you pay the highest amount you pay the debt with the lowest balance first while still paying the minimum payments on the rest of your debt. Just like above, once you pay off the lowest balance debt combine that payment with the minimum payment on the next lowest balance and so on and so forth.
Lastly, our KeepTrack service can help you setup and track debt repayment goals so you can see your progress. Just log in to your One Nevada account online and look for ‘KeepTrack' to get started.
Build a safety net
It's hard to get out of debt if you don't have the means to pay for emergencies. What counts as an emergency? Some expenses can feel "urgent", but may not be an actual emergency. Review our 6-minute, Building Emergency Savings guide to tell the difference.
Most experts recommend that you build a savings safety net equal to three to six months' worth of living expenses. We know. That sounds like a ton of money, but please remember that savings is a process that takes time and discipline. Start small, even if it's only $5 a month and just keep plugging away at it. You can do it!
Debt can be a serious drag on your life plans. The key is that you stay in control of debt instead of debt controlling you. That is a lot easier said than done. If debt has you backed into a corner and you don't see any way out, please try our Debt Coaching Service available through BALANCE Financial Fitness.
BALANCE will work with you to explore the option of a Debt Management Plan, which can offer lower interest rates, a cessation of certain fees, and lower required monthly payments. They will work with creditors on your behalf to get you on the path to living life on your terms.