Are you a student who took a huge loan for tuition fees? Or, are you thinking of opting for a loan to buy a house for your family? Whatever the reason might be, you need to make sure that you’re able to pay off your debt quickly to live a financially stress-free life.
According to a study, statistics show that, in 2018, American households hit a debt record of $13.21 trillion.
Therefore, you need to form a plan and strategies to help pay off your debt as quickly as possible within a short time period.
Keep reading to know more about how you can save yourself from debt stress.
Let’s Talk Numbers: Statistics On Savings In The United States
- A survey conducted by GoBankingRates revealed that about 70% of the US population has less than $1000 in their savings and 45% have zero savings.
- Another study in 2020 showed that one-third of the American homeowners have less than $500 for emergency funds, and 75% of people who were laid off from their job due to Covid-19 couldn’t arrange $500 cash.
- Fed data displays that 40% of U.S. households won’t come up with $400 emergency purposes.
- Statistics show that Americans have over $1.71 trillion of student debt to pay in 2021.
What is Debt?
In simple terms, debt is the amount of money that you owe to someone else with a condition to repay it within a stipulated period of time. For example, it could be to a lender from whom you have borrowed money or a loan from a financial institution.
Debt is a form of liability that you owe to payout every month, and to become rich, you need to gain assets and not liabilities.
Examples of debt that may act as short term or long term liabilities are:
- paying out rent to your landlord every month
- paying monthly installments to your credit card or mortgage
- salary payments to your employees
- monthly electric and internet bills
- travel expenses, including car, or public transport, etc.
Well, debt is not all bad, while some debts can be good in the long term. It is essential you understand the differences early in your life not to take tons of bad debt.
Here are the two types of debt.
There are two types of debt:
1. Secured Debt
This type of debt is backed by an asset and holds a lower risk to the lender with lower interest rates. Example: Mortgage of a house.
2. Unsecured Debt
Here, the debt is not backed by any asset and has a higher risk to the lender and higher interest rates. Example: Credit card.
In most cases, the most common forms of debt are usually:
- the amount due on a credit card,
- loan for education,
- auto loan, or a mortgage payment on a house.
The current generation is being taught to live a good life by opting for credit cards and loans. This mindset has resulted in most of us going into debt.
While some debts are manageable amounts, most of them require a huge chunk of income for the monthly payments of debt. This situation leaves them with less disposable income and leads to a vicious cycle of entering into more debt to meet unforeseen expenses.
Why Is Paying Debt Important?
There’s good debt and bad debt. Good debt allows you to improve your financial conditions in the long run. For instance, a student might take a student loan to aid in their payment of huge tuition fees that further opens up different avenues for them in the long run.
Whereas bad debt can hold you back from living the life of your dreams. You want to make sure that you don’t find yourself trapped in bad debt.
If you find yourself stuck and don’t find the motivation to get out of your debt soon, here are the top three reasons that will definitely change your mind.
1. Financial Freedom
Who doesn’t want financial freedom, right? But what if your debt isn’t letting you go for that dream vacation or maybe start that side business that you have wanted for so long? Sounds scary, right? Well, that’s why you should come out of your debt in a short time period. Paying off your debt early can help you achieve your goals without delaying them in the future.
We know that without risk, you cannot achieve anything. But debt risk is something that you would like to avoid at any cost. It brings unwanted tension and stress to your life and can even impact your overall well-being negatively. Being debt-free eliminates the risk of losing your home, not meeting emergency expenses, etc.
3. Mental Well-Being
Did you know that debt can have a severe impact on your mental health?
Yes. Debt can give you stress and lead to low self-esteem in individuals with a financial crisis. According to the American Psychological Association study, 72% of Americans feel stressed out about money.
The number is alarming, to say the least, but these factors can manifest into other physical ailments. So getting debt-free is like lifting off a huge weight off your shoulders.
Below are some tips through which you can break the debt cycle and pay off your dues quickly.
How To Get Out Of Debt Quickly?
Unmanageable debt can take a serious toll on your emotional and physical well-being. Therefore, it’s imperative to get out of debt as soon as possible, and in such a way, the thought wouldn’t cripple your lifestyle for many years to come.
Pay off your debt quickly with these simple steps as explained below:
1. The Avalanche Method
By using this method, you can pay the least amount required for every debt. And the rest of the remaining amount can be paid as a lump sum towards the debt with the highest interest rate.
2. The Snowball Method
In this method, after paying the minimum due amount for every debt, the remaining amount is used to pay up the smallest debts. This tip encourages the person because the smaller debts get paid up faster.
3. The Debt Settlements Method
This method allows both the creditor and the debtor to negotiate and reach a settlement amount, which is lesser than the outstanding amount. As a result, it provides you with much-needed relief to the debtor, and the creditor will eventually get assured of the payment of the large outstanding amount.
4. The Balance Transfer Method
This method can transfer the outstanding debt amount from the current financial institution to another, which charges a much lower interest rate or a longer duration to repay the loan. The transfer can also happen to a better repayment plan by the same financial institution.
5. The Debt Consolidation Method
In this method, the debtor can negotiate with different lenders and convert many outstanding debts into a single consolidated debt with better interest rates and repayment duration.
Now that you’re aware of these methods, you can take the help of any of these tips to pay off your debt, as they are proven to be very useful for becoming debt-free.
Let’s dig in to discuss powerful ways to pay off the most common types of debt:
- Credit card debt
- Mortgage debt
How To Pay Off Credit Card Debt Quickly?
Paying off credit card debt isn’t a piece of cake. But that doesn’t mean that it’s not doable either. Once you learn and apply these tips that we have mentioned below, slowly, you’ll be able to pay off credit card debt and get rid of that dreadful debt amount quickly.
According to a study, on average, each household in America carries $8,398 in credit card debt.
A credit card is the most common debt instrument used by an individual. It is one of the most easily accessible unsecured debt, making it very tempting for the user to opt for impulse purchases or high-cost FMCG goods. They have the highest interest percentages for the age group belonging from teens to twenties as it is not secured.
The interest rates vary widely based on:
- the credit scores
- annual percentage rates (APR)
- and the type of credit card
As a result, the high credit card debt takes a large part of your monthly income due to their high-interest rates.
Here are some ways you can pay the credit card debt as fast as possible:
1. Pay more than the smallest amount due per month
It is better if you can pay the maximum amount. Usually, the least amount due per month is less than the interest charged for that time. However, if only a small amount is paid, it will later increase the amount due.
2. Make smart choices when using a credit card
Merge the amount due first as many credit cards make it challenging for the user to track both the spending and payments. If you merge all the outstanding amounts into a single loan, it will lower the interest rates because the interest rates on personal loans are far lower. Hence, you will have a fixed amount due every month.
- After consolidation, cancel all the cards except the one you will use for emergency purposes such as medical emergencies.
- Negotiate with your banker and switch your outstanding balance to a credit card with lower interest rates and a better points system.
- Get financial counseling on how to focus on spending. Focus on necessities and avoid impulsive purchases.
- Also, you can first pay off the amount which has the highest interest.
How To Quickly Pay Off Mortgage Debt?
You know that if your dream is to purchase a property one day, then a mortgage is one of the ways to achieve that dream.
A mortgage is one of the most significant personal finance decisions for many people due to its long-term debt. Also, it subsequently influences your financial decisions for many years to come.
Most people, when purchasing a property, opt for the max amount they can afford. But, sadly, they often forget to think of other factors such as an unforeseen increase in expenses (another baby, relocation) or an emergency, making it challenging to balance the income and expenses.
Below are some ways in which you can pay off a mortgage quickly by decreasing the burden on the property owners:
1. Never Buy A Property That Exceeds Your Budget
It might look attractive and lure you towards stretching the budget a bit more to go for the dream home, but remember that a mortgage is a long-term loan. Therefore, buying a property within your budget is a sensible decision, and you can renovate it as per your choice in the future.
2. Pay The Principal Amount First In The Early Years
More often than not, people have the flexibility to pay more than the monthly payments in the first years of a mortgage. So, take full advantage of the same and pay as much as you can. This will reduce the interest paid over the years and reduce the duration of the mortgage.
3. Be Frugal In The Beginning
In the first few years of taking the mortgage, reduce discretionary spending, and use your disposable income to make as much payment as possible towards the mortgage.
4. Pay-off In Bulk
Use unexpected income such as a tax refund or a bonus towards more payment of the mortgage.
5. Keep Looking Out For Better Interest Rates
As a mortgage is a long-term loan, the interest rates will keep varying throughout. Therefore, do not avoid negotiating with your banker when the interest rates are low. If possible, also consider switching the financial institutions that are offering a better deal.
Also, find out which types of interest rates suit you better – whether you would want to take out a fixed-rate mortgage or flexible-rate mortgage.
Sources also suggest that banks will lower interest rates when:
- paid on cash held in bank certificates of deposits (CDs),
- regular savings accounts,
- and money market accounts.
6. Earn More Money To Pay Off Debt Quickly
Make some passive income to clear off your big loans faster.
- Online business
- Write a book
- Start freelancing
- Improve your skills and ask for a salary revision
- Rent out extra space and use the proceeds towards mortgage payments
A Word From AlignThoughts,
It can be quite intimidating to pay off debt quickly, but the process becomes much easier with the right tools and strategies. All you need is some planning, discipline, and external help like the article above.
Key Takeaways On How To Pay Off Your Debt Fast
- Begin with forming our right strategies to clear your outstanding dues.
- For instance, pay off the large amount first, then slowly start clearing the smaller due amounts.
- Prioritize between your needs and wants to cut down on unwanted monthly expenses.
- You can also make a monthly budget plan to avoid impulse purchasing.
- In the case of a mortgage, try to pay the maximum principal amount first to rescue the monthly balance of monthly installments.
- Check if fixed rates or flexible rates suit you well for your mortgage.
- And most importantly, always go for a mortgage only if you’re sure that you’ll be able to pay it off soon in the future.
Is being debt-free the new rich?
Imagine that there’s a person who earns a six-figure monthly income, but 80% of their earning goes into repaying his debt. On the other hand, another person earns less, but they can live a debt-free life.
If you see the numbers, who do you consider to be rich? At first glance, you’ll think the first person to earn a six-figure income is. But is that all that is there to be rich?
Maybe they earn a lot of money but cannot live a happy and fulfilling life due to debt. At the same time, the second person lives life on their own terms. They have the financial freedom to do anything they want.
Hence, we can say that being debt-free definitely is the new rich.
How to start paying off debt?
You can start clearing your debt in the following ways:
- Create a monthly budget.
- Clear the amount due for expensive debt first.
- Put a stop to your credit card spending.
- Always pay the amount more than the minimum balance due.
How to become debt-free on a low income?
These are small steps that you can take to repay your loan on a low income:
- First, limit your credit card spending.
- Start a small freelancing business on the side.
- Only take loans that you can afford to pay in the future.
- Pay as much as you can at once.
Should I pay off my car or credit card?
It’s always wise to pay off the credit card loan first as they have higher APRs than car loans.
Is paying off debt worth it?
It shouldn’t even be a question. The sooner you pay your debt, the sooner you’ll be able to live a stress-free life.
Which debt to pay off first?
We advise you first to pay off debt, which has higher interest rates. What you can do is order your debts from highest to lowest according to their interest rates and make payments for the higher interest debts first.