The Top Strategies to Get Out of Debt

The Top Strategies to Get Out of Debt

Debt can have an undesirable impact on anyone’s life. If you have piles of money to be paid, the thought of becoming debt free can be a tad too overwhelming.

Most people are stuck in the stressful cycle of debt repayments. 

If you are in debt you are not alone, it is a cultural norm in the US. The US public debt (which is owed by the government) lies around the $29 trillion mark. Given the example of our leaders, and ease of access to credit, it is apparent that people find it challenging to manage their expenses and avoid debt at the same time.


What Debt Can Do to Your Daily Life?

Debt is like an invisible chain. You don’t realize it’s pulling you back from taking monumental strides in your life.

Sleepless nights is just one negative side effect of having considerable debts. However, there are many practical adverse effects of inefficient debt planning.

  • Low credit score
  • Ineligibility for loans
  • Disqualification for mortgage
  • Impact on daily expenses
  • Direct blow on savings

In addition to these common issues, you may face challenges at specific workplaces. 

For instance, some employers (such as banks and credit unions) conduct credit checks on 

Who Does Debt Affect the Most?

The change in average debt percentage by generation gives the perfect picture of the maximum impact of debts. 

Table: Generations divided as per age group

Generation

Ages (In Years)

Total Average Debt in the year 2020 ($) 

Silent Generation

75 and above

41,281

Baby boomers

56 to 74

97,290

Generation X

40 to 55

140,643

Millennials

24 to 39

87,448

Generation Z

18 to 23

16,043

As per statistics, there is approximately a 68% rise in average debts in Generation Z, followed by 12% amongst Millennials.

Generation X, Baby Boomers, and the Silent Generation have approximately 4%, 0.3%, and – (minus) 5% total average debt change. 

Note: These percentages apply for the years 2019 to 2020. All values are rounded.
 

What To Conclude from These Statistics?

The statistics show that younger people have been more prone to debt growth in recent years. However, in terms of average debt load, Generation X has the highest amount of debt.

Thus, we can conclude that debt affects students, millennials, and people with home and auto loans. 

It is, however, interesting to note that millennials have the fastest-growing non-mortgage debt amongst all generations.
 

Best Strategies to Overcome Debt

Irrespective of your generation, paying off debts is a top priority. Here are ways to overcome this financial burden.
 

1) Never Pay Just the Minimum Payment Amount

Paying more than the minimum amount is the best way to get out of debt and save on interest. 

For instance, if you own $10,000 at 12% interest and your payment is $500 per month it will take 23 months and cost $1,213 in interest.

However, if you pay $700 per month, the period will decrease to 16 months and you will save $366 in interest. By paying an extra $200 per month you save 7 months, and $366, which is almost an entire payment worth of interest. Here is a link to our loan pay ahead calculator for this example where you can play with the numbers.
 

2) Use the Debt Snowball Method

The debt snowball method is analogous to the process of elimination. In this technique, you focus on the smallest debt first, knock it out, then move to the next smallest.

Using the snowball method a person with multiple debts would focus on paying off their smallest balance, regardless of interest rates, payments, etc. This can be a way to provide a series of quick wins and free up cash flow in your budget. As you pay off debts the momentum “snowballs” until you are left with your last major account.
 

3) Use the Avalanche Method

The Avalanche method concentrates on the highest-interest debt. In simple words, you focus on eliminating debt with a higher interest rate than other debts.

In this method, you start by arranging all your debts in descending interest rates. Thus, the one with the highest interest stays at the top of the list.

Next, you focus on increasing monthly payments for that debt. On the other hand, you continue paying the minimum amount for other dues.

Consequently, you crash the biggest debt in the form of an avalanche.
 

4) Think About Consolidating Debt

Debt consolidation loans are available from banks and lending institutes at lower interest rates. In this strategy, you pay off your existing debts through this loan.

Thus, you can eliminate any student, auto, personal, mortgage, or credit card debts through refinancing.

In this process, you will consequently have only one loan to repay. It is important to realize that you can even ask a close friend or family member for co-signing a debt consolidation loan.

Check out our loan consolidation calculator to play with the numbers for your scenario.
 

5) Use Stimulus Money and Tax Refunds

Stimulus checks and tax refunds from the Federal Government are lucrative sources of extra cash. The government is hoping you will spend it to help keep the economy running.

Instead of using this cash for buying stuff you don’t need, another option is to plow it into your debts (hehe, snow analogy again). For example you could use this strategy to clear your credit card balances.
 

6) Negotiate A Settlement of Your Unpaid Debts

This strategy can be a bit tricky. However, with a reliable debt settlement company, you can end up saving some money.

Debt settlement is the act of negotiating with your lender to pay less than you owe. In such cases, you usually need to pay the finalized amount entirely.

By this strategy, you can save the interest and additional repayment amount up to a certain extent. Still, it is imperative to discuss these negotiations in-depth and mutually.

 

Endnotes

Getting out of debt isn’t an instant process. You need to plan your finances systematically. A step-by-step assessment of debts is an excellent way to initiate your repayment planning.

However, these strategies can prove subjective. Hence, it is better to implement the most suitable one from your perspective. This way, you can overcome your debt efficiently and without much hassle.

The post The Top Strategies to Get Out of Debt is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Budgeting
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