Paying Down Debt: Why it matters and how to do it

Gather information

Collect together all the information you have on your debt, including interest rates, remaining balances and minimum payments. This will help identify the debt that needs prioritising and provide you with a clear picture of what you owe. For most people, this is the toughest part – seeing it all in writing. But it’s a vital step, and people often say they feel much better once the unknown is known.

Create a budget

This is necessary in order to establish exactly how much you can allocate each month towards paying off your debt. Any unnecessary expenses should be cut back in order to pay off the debt as quickly as possible.

Create a repayment plan

There are two schools of thought here and you should do what resonates with you most. The debt snowball method focuses on paying off the smallest debts first in order to build momentum and motivation.

The debt avalanche method prioritises debts with the highest interest first in order to save the most amount of money.

Consolidate debt

Depending on how many debts you have, you may want to consider consolidating them into one, low-interest loan. This can make it all easier to manage and can reduce costs.

Automate payments

Never miss a payment and ensure your debts are paid before anything else by automating payments to take place straight after you get paid.

Expecting a windfall? Use it wisely.

This requires discipline, but should you receive a bonus, inheritance or tax refund, you should pump that money straight into paying off your debt. This will make you better off in the end.

Negotiate

If you are struggling to pay off your debt, there is often room for negotiation. Contact the loan provider and explain your situation. They will often suggest a payment plan that is achievable. There are also debt charities such as Step Change that will help you with this process.

Avoid any further debt

Avoid spending money you haven’t yet earned. Live within your means.

“You can’t build wealth while you’re paying for your past.”

High interest rates

Interest can spiral out of control and leave you with more debt than when you first made the purchase. This is especially true of credit cards and payday loans. By saving for items upfront – you can avoid the extra costs associated with interest.

Financial freedom

Ridding yourself of debt can give you more control over how you spend, save and invest your income in order to grow your wealth.

Improved credit score

We all know that debt can have a negative impact on your credit score which makes it hard to secure credit cards, apply for a loan or get a mortgage.

Reduce stress

Debt is a major cause of stress for families and individuals. Taking control and putting a robust plan in place to tackle debt can help your financial and emotional well-being.

Enjoy more disposable income every month

That’s more money for things that you enjoy like holidays and hobbies.

Save and invest

Once you have your debt under control you can set your mind on building an emergency fund and even growing your wealth by investing.

Obtain financial security

Freedom from debt leaves you better prepared to weather any financial storms that may come your way.

Be in a better position to realise long-term goals

Looking to buy a home, start a business or retire? These are all much more achievable without debt looming over you.

Making only minimum payments

Don’t do minimum payments. Get the job done as quickly as possible by paying as much as you can feasibly afford – this will also save you interest.

Ignoring your debt

Your debt is actually building while you ignore it. Face debt head-on and deal with it as efficiently as possible.

Taking on more debt to pay debt

While consolidating your debts and moving them to one, easy-to-pay solution can be helpful, make sure you understand the terms of the new loan and ensure you’re not jumping from the frying pay into the fire.

Anything we haven’t covered? Get in contact and let us know.