5 Debt Cutting Strategies That Actually Work
Almost all debt is bad. If the debt isn’t towards an investment that yields a positive ROI, it’s bad debt. And even if your debt is around an investment, you’ll eventually have to pay it off.
Debt has the ability to snowball if you don’t properly manage it. And plenty of big purchases encourage massive debt. Many people spend years paying off their car only to end up buying a new one so they stay in style.
Similarly, homeowners will spend decades paying their mortgage. Unlike a car, a house is an asset that can increase in value overtime which gives you a fighting chance at a positive ROI.
In any event, debt can add up, and if you’re looking to cut down, here are 5 strategies that will get you on the right track.
#1: Track All Of Your Expenses
You can’t get out of debt unless you change your mindset, and this is the best activity for changing your money mindset. You’ll get a better idea of where your money goes and cost cutting opportunities.
If you eat out often, consider making more meals at home. This will help you save some money. While it won’t be a game changer for everyone, it is a step in the right direction. Each person’s expenses will be different, but finding areas of excess, no matter how big or small, gets you closer to being debt free.
If you aren’t in debt, this is still a great strategy as it will decrease your chances of getting deep into debt (excluding a mortgage and car payment. Buying a used car is worth it).
#2: Rank Your Debt By The Interest Rates
Let’s say you have a few debts to pay. Perhaps you have student loans, a mortgage, a car payment, and a credit card. Where should your $50 go?
You’ll have minimum payments for some of your debt such as a monthly mortgage, but after making the minimum payments, where should the remaining money go?
That’s where it’s important to look at interest rates. If you have a 3% interest rate on your mortgage, it means you’ll have to pay an extra $3 for every $100 you put into that mortgage.
However, if you have a 15% interest rate on your credit card, you’ll pay 5 times as much for every $100 in credit card debt versus your mortgage debt.
Therefore, it makes sense to put excess money into the credit card debt until it’s paid off.
One thing you may consider is taking out a HELOC (home equity line of credit) to pay off the credit card debt. The HELOC will have a lower interest rate than the credit card debt which will make it easier to pay off over time.
In any event, using an extra $50 to pay off the debt with a 15% interest rate does you more good than using that same extra money to pay off the debt with a 3% interest rate.
#3: Live Below Your Means
There are only two ways to pay down your debt faster. The first way is to make more income. You ask for the raise, start the side hustle, or launch your own product.
The second way to pay down your debt faster is to live below your means. Tracking your expenses allows you to discover opportunities to trim down your expenses so you can do a better job at living below your means.
Living below your means doesn’t mean having a worse life. It means getting clear about what matters in your life and not giving into good marketing from companies that will eagerly take your extra dollar. It’s reduction of the things that don’t matter and an embrace of simplicity.
#4: Bite Into The Principal Amount
If you keep paying the interest payments without getting into the principal, you’ll continue to owe interest. The only way out of debt is to make the principal equal zero. You can speed up the process by paying off some of your principal before the interest is due.
A great money hack for paying off your mortgage quicker is to pay an extra $50 each month. If your monthly payment is $1,000, you make that minimum payment and then pay an additional $50.
That additional $50 bites at the principal and doesn’t get interest. That means you won’t have to pay the extra $1.50 based on the 3% interest rate. Do this each month, and you’ll save an annualized $18 from interest payments. It may feel small, but it will add up overtime, especially if you find an extra $100 each month to put into your mortgage.
This concept becomes more valuable for credit card debt. The extra $50 you put in to pay down your principal won’t be charged with the 15% interest rate, saving you $7.50 in interest payments. If you put a few zeroes next to these numbers, you’ll see how biting into the principal amount makes a big difference.
Biting into the principal is the only way to pay your way out of debt, so get good at it now with the extra money you have.
#5: Invest Some Of Your Money
Mark Zuckerberg still pays the mortgage for one of his properties because it’s got a measly interest rate under 2%. You might want to invest some of your money into assets that rise higher than the interest rate of your debt.
If you have a 3% interest rate on your debt, and you can get a 10% return in one year, it would make sense to get the return from your investment and then use those proceeds to chip away at your debt.
You shouldn’t do this with every dollar you make because investments can go down as well, but if you set aside some cash for this purpose, you can weather some of the storms along the way.
You can also invest in dividend stocks and use that cashflow to help with paying some of your debts.
And if you have a property, treat it like an investment. Consider a short-term tenant to help pay the mortgage or listing one of your rooms on Airbnb. Even if you just break even on your home, it removes a big debt for each month you’re able to break even.
Getting out of debt is a journey, and even when you get out of debt, keeping an eye on your finances will ensure that you don’t fall back into debt.