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Thinking of making Jan. 1 the day to start paying off your debt? You’re not alone: Americans did their best to save in 2021 but according to a recent survey by MassMutual, almost half (48%) of Americans will use the money they’ve set aside to pay for the holidays. As many as 59% of people who used their credit card to pay for presents and travel worry they will not pay it off for at least six months.
And anyone who’s ever struggled with paying off debt knows that it’s a lot more complicated than just making a budget. According to Melanie Lockert, author of Dear Debt and host of The Mental Health and Wealth Show, paying for the past can bring up a lot of emotions. “All that accumulated interest makes paying off debt feel like you’re taking two steps forward, one step back,” she said. “Getting out of debt also requires you to do something different than what got you into debt, which is hard for people in the beginning stages.” Here’s how to do it.
Where is the debt coming from? If you zoom out, you can start to push aside the shame and start looking at it with a more critical eye. For example, is the debt an income issue or a spending problem or something else like medical debt? Those are different things with different solutions, Lockert says.
Once you know your overall debt, monthly payments, and interest rates — and have written down — the next step is to look at your take-home pay and current expenses and see if it’s possible to throw extra toward the debt. Start small with your steps and progress. For example, if you’re behind on payments, make a goal to make the minimum payment. If you’re already making minimum payments, commit to paying more than the minimum.
Is a pen and paper or a spreadsheet too old-school? Look for tools and apps that can put all the numbers in one place. Lockert recommends Personal Capital, an app with free personal finance tools to track your budgeting, including savings and investments. Personal Capital makes its money charging for wealth management services for individuals with over $100,000 in investable assets. “I think Personal Capital is a great tool for tracking finances,” she says.
Free budgeting tool
Forbes gives this free money tracking and budgeting app its highest score among “best budgeting apps,” at 4.5 out of 5 stars, noting that it’s particularly good for investors.
That said, she adds that: “I think the most important thing is to stay consistent and know what tool (or not) will work best to keep you going and motivated.” So other recommended budgeting tools include YNAB, a budgeting app that lets you track your budget and helps you manage your loans, ($14.99/ month), and PocketGuard, which also lets you track your budget and assist with debt repayment planning ($7.99/month).
Interest makes debt even more expensive, so if you can lower your interest rates, it’s something to consider. A personal loan could help you pay off your higher-interest debt, as personal loan rates can start at 5%, a more manageable figure than most credit cards. That said, Lockert recommends proceeding with caution.
“I think it can be a slippery slope to use another loan to pay off another loan. If a borrower knows the root cause of debt and has addressed those issues, taking out a personal loan at a lower interest can help,” she said. “But it’s important to have a plan and know exactly how much you’re actually saving and be aware of the interest rate and any potential fees or drawbacks.”
Lockert recommends that before you look at your numbers, it’s important to prepare emotionally ahead of time. Be ready to see the worst and know that whatever potential mistakes you made, you’re making a plan now to get out. “Depending on the type of debt, it can bring up previous financial mistakes, shame, guilt, and so much more,” she says. But this is the time to put that behind you, and make 2022 the year you tackle your debt as quickly as possible.
Do you have a supportive friend who has their act together, financially? “If needed, have a trusted friend over while you look at your accounts and write down what you owe,” she said. And if that friend can be a support network for your get-out-of-debt journey, even better. A study from Ohio State University indicated that seeking assistance from someone who you admire can offer better results than saving with a friend who’s in the same exact boat or struggling even more than you are.
“No one is taught this stuff and it’s hush-hush in much of daily life,” Lockert says. “Knowing you’re not alone can help you move forward and take action, but it’s the isolation that can keep us stuck.”
Instead of just slogging through the debt repayment process, Lockert recommends committing to a fun and energizing reason as to why you want to do it. Create milestones and mini-rewards or pick up a new side gig to learn something new with a goal as to where you want that money to go.
“When I was paying off debt, I created a ‘debt-free dream list’ and put moving back to LA, getting cats, and taking my mom to Italy on the list,” she said. “When I was paying off debt, I was motivated by those dreams.”
It’s a marathon to pay off debt, and some miles will be better than others. “You may have seasons where you put more toward paying down your debt than others,” she said. “That’s okay! The key is to stay the course.”
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