Debt from the holidays putting a damper on your new year? Or maybe loan payments are holding you back from pursuing bigger financial goals?
Try these tips to reduce your debt and restore your motivation to save.
1. Make biweekly payments
One popular strategy for accelerating debt repayment is to make biweekly payments every two weeks, each totalling half your monthly payment. An important note: this method will result in you making 26 payments each year, which is two more than you would make if you made a payment on the first day of the month and the middle of the month, so you will have to budget accordingly. The advantage is that you will reduce your amount owed at a faster rate and, thus, save on interest. Plus, a biweekly schedule can alleviate cash-flow concerns by distributing smaller payments more evenly throughout the month. Use our biweekly payment calculator to see what your repayment schedule would look like.
2. Pay off loans with the highest interest rates first
As a general rule, paying down debts with the highest interest rates should be your first priority. With this strategy, you’ll pay off debt faster and with less total interest in the long run. To make this happen, you can make the minimum payment on your other, lower-interest accounts. Then, once the loan with the highest interest rate is paid off, you apply the minimum monthly payment you would have spent on that loan to the loan with the next highest interest rate, and so on until you reach the end of the line and you’re debt free. Woot!
3. Alternatively, prioritize loans with the smallest total balance
Another repayment strategy you could try is the debt snowball method. The idea behind the debt snowball method is that you repay loans with the smallest total balance first and then redistribute the money you would have spent on those payments to your other, larger loans. Eliminating smaller debts quickly helps you stay motivated to continue paying off bigger debts and, if done properly, can lead to a faster repayment period and less total interest paid overall.
4. Pay it off in a lump sum
If you’re lucky enough to be starting the year with a nice bonus check burning a hole in your pocket, consider making one large payment toward your debt, be it a mortgage, auto loan or credit card debt. When you pay off debt, you are receiving a guaranteed return on your money – the amount of interest you would otherwise be paying on any outstanding balance. You’ll also want to keep this in mind for your tax return in April!
Need help deciding how to make it happen? Schedule a meeting with us, and we'll help you figure out a debt repayment strategy that makes sense for your situation – whatever it may be.