This is a guest article by Jason from WorkSaveLive. If you are interested in contributing to Debt RoundUp, please follow our guidelines.
According to Static Brain, the average amount of household credit card debt in the US was almost $16,000 in the middle of 2012. With economic factors, many people have only seen their debt go up since then. It’s extremely common for individuals and families to feel overwhelmed by their debt and it’s often difficult to see a way out, but there are debt reduction strategies that work without massive amounts of extra cash on hand.
Debt Consolidation
A possible way to get your debt under control is to consolidate multiple accounts into a single loan. With competing information published online and elsewhere, the question is debt consolidation a good idea? constantly gets asked. Whether or not this is a viable solution for you depends on which debt consolidation option you choose.
There are three options when it comes to consolidation: (1) finding a company that will provide loans to consolidate revolving credit accounts, (2) using equity in your home to refinance and pay off other debt, or (3) you can work with a debt consolidation company to negotiate a lower interest rate with your creditors (and hopefully a lower monthly payment). Benefits of consolidation include:
- A single monthly payment that helps you budget and keep track of finances
- Lower interest rates that save money on debt payments in the long-term
- A reduction in the amount you have to pay each month
Since consolidation can impact your credit report, leave you without open credit accounts or create a future situation where you are upside down on your mortgage, you do want to be careful. With that in mind, opting for option #3 typically makes the most sense for people. However, make sure you weigh all the options, read the fine print and understand the possible impact on future finances before you opt to consolidate.
One Bill at a Time
Another strategy that personal finance experts often talk about is paying down debt one bill at a time. Many people make the mistake of thinking that they need a large lump sum of money to make a dent in debt. All you need is a little extra money each month. Imagine a simplified model where you owe the following:
- $500 on a store account with a $50 minimum payment,
- $1,000 on a credit card with a $75 minimum payment, and
- $8,000 on a car with a monthly payment of $200.
Perhaps living expenses run $1,000 per month. When you throw in those monthly payments, you need $1,325 just to pay bills and living expenses. For this hypothetical situation, consider that you bring home $1,500 per month, which is $175 more than you need. You could decide to spend $50 on entertainment and extras, save $75 and use the remaining $50 to pay extra on debt.
That $50 may not sound like much, but if you use it to put $50 a month extra on the store account, you could pay it off in less than ten months. Then, you have $100 extra because you no longer need to pay the minimum on the store credit card. Putting that money on the credit card each month allows you to pay it off in less than a year. Now, you have $175 extra to pay on the car every month. It becomes a snowball effect!
Whether you consolidate or attempt to tackle debt one bill at a time, making a conscious decision to reduce your debt is a valuable choice for the future. Do not get discouraged at the time it takes to get your finances in order. Just work each day to make better choices, save money and reduce debt.
Jason is the creator of the free How to Become Rich e-course, and the founder of WorkSaveLive where he educates his readers on how to save money, pay down debt, and build wealth.
Photo via Vectorportal
About Guest Author
Good stuff, Jason. I like both of these options, and generally recommended them both together, if possible.
AverageJoe recently posted..Hiring a Financial Advisor: Clues from the Receptionist
Thanks for this post! After trying to pay off debt a million different ways, the snowball method is the only way to go, in my opinion. Behavior modification is the key, not math. Attack it viciously and don’t stop!
Tony@YouOnlyDoThisOnce recently posted..6 Ways to Surround Yourself with Passionate People
I went with the avalanche method because emotion is what got me into my mess in the first place. I needed to take it out and go with the tried and true, Math!
Having personally been paying off debt for 6 years, our behavior has been modified and the snowball method just doesn’t make sense any longer. I’m all for the avalanche method at this point. Saying that, the snowball method is great for people that are first getting started.
Andy recently posted..Recipe: Lemon and Blueberry Muffins
I agree with the avalanche method.
Good tips Jason. I think either can be a great ways to get out from under debt. It just depends on the preference and the cash you have on hand.
John S @ Frugal Rules recently posted..Reader Question: Should I Invest in Mutual Funds or ETFs?
You’re absolutely right, John. Which debt reduction option is best ultimately comes down to each person and their particular scenario. The most important part is being educated on each option and being able to decipher which would work best for your particular case.
Andy recently posted..Recipe: Lemon and Blueberry Muffins
Good tips Jason! These are both viable options and I think it really depends on each person’s situation and what they are comfortable with.
Greg@ClubThrifty recently posted..How to Save Money in College: The Benefit of Hindsight
Thankfully I’ve never had to go down the consolidation path, but I am working hard to pay off the one credit card I have. I can’t wait for the day when it is finally paid off!
Mackenzie recently posted..Budget Snafu and a Grocery Challenge Update
Good luck to you Mackenzie. It feels great to pay off the last credit card.
I have always been a slow and stead person with everything that I do.
Sean @ One Smart Dollar recently posted..The Downsides to Common Frugal Tips
That is a very smart approach Sean.
I agree with AverageJoe–both of these options are effective and can make even greater impact when balanced together
The Happy Homeowner recently posted..Renovate and Organize Your Home Office on a Budget
Small regular overspends are a big part of getting into debt, In the same way small debt repayments can provide the way out.
Money Bulldog recently posted..Why Cash Flow Is More Important Than Profit!
Well said Money Bulldog! I’ve never thought of it like that but you’re absolutely right.
I like the one bill at a time process, to gain momentum like the snowball. Ideally a 0% balance transfer would make things easier but if this is not an option it is worth looking into consolidation.
Pauline recently posted..13 money resolutions for 2013: #9 max it out!
I do think a balance transfer would be a viable option to supplement the one bill at a time strategy. The only problem with them is that they generally require a good credit score to qualify.
Wow, Jason, you are everywhere, like Batman or something. I think whatever method you use, just start. It gets much better after you face the reality of debt and make changes. The snowball is a great way to get started. When you can cross off some of the smaller debts, it is a huge morale boost.
Kim@Eyesonthedollar recently posted..My Child Needs Glasses, Now What?
I think he is Batman.
I did the 1 bill at a time process. It worked well for me mentally, and motivated me to keep going.
Marissa @ Thirty Six Months recently posted..How to Market Your Blog Like a Startup