The easiest resolutions to break
Plenty of people make New Year’s resolutions for the same reason they send out holiday cards; because it’s something you’re supposed to do every December.
Keeping your resolutions is a different matter entirely. In fact, some of us joke ruefully about how quickly we’ll stop getting up for that 6 a.m. workout, or how soon we’ll ditch the patch in favor of a fresh pack of Marlboros.
Of all resolutions, gaining financial ground is one of the most commonly broken, especially if debt is nipping at your heels. And it is dogging many of us: According to TransUnion, the average credit card borrower owed $5,232 at the end of 2015.
Make this the year you keep your get-out-of-debt resolution and get on solid financial footing. Easier said than done, right? True, it takes fortitude to lose debt just as it does to lose weight. But shedding debt isn’t complicated. In fact, you can do it by following these three simple steps.
1. List what you owe
List every outstanding balance: mortgage, student loans, credit card balances, auto loans and any other place you owe money. (Yes, including the bucks your brother loaned you to put new tires on that lemon you’re still paying off.)
List every balance and, if applicable, every interest rate.
2. Decide which debt to slay first — and focus
Some recommend going after the lowest balance first, because it’s easiest to kill and the act of quickly paying off one entire balance can provide helpful motivation if you’re feeling overwhelmed.
Myself, I’d aim for the debt with the highest interest rate. This article explains how the two different approaches work (and may suit different individuals) and why focusing on the debt with the highest interest rate is the most cost-effective.
However, there are times when paying off a particular debt may trump all others. For instance, if you’ve borrowed against your retirement plan and feel your job is at risk, then pay that bad boy down, stat. That’s because if you lose your job you’ll have to repay the debt relatively quickly or risk having it termed a “withdrawal,” which comes with a big fat tax bill.
Also, even if your student loan rates are higher than your credit card rates, pay down the cards first. Doing so frees up credit for future emergencies (car repair, medical treatment) whereas money paid toward an educational loan does not.
Once you have determined which debt you will target first, do so with laser focus. After you’ve met your basic expenses for the month, make the minimum payments on other obligations and throw as much cash as possible at the targeted debt.
You’ll want to pare expenses way down. Every dollar you don’t spend needlessly is a dollar that will help clear your financial decks.
Not sure how to cut costs? Start by tracking them. A free service like PowerWallet will tell you where your dollars are going, which can be a real eye-opener. Next, use the Money Talks News archives for ideas on how to save money in every aspect of your life.
3. Now, ‘snowball’ your remaining debts
Once you’ve paid off a debt, you can “snowball” it – that is, direct all the money you were paying on the first debt to the next obligation on your hit list. Again, you’ll make minimum payments on all the others in order to focus on paying one off quickly.
Don’t just kill these debts, though. Write their obituaries. Certified financial planner Kimberly Foss suggests posting reminders of paid-off debts where you’ll see them – the bathroom mirror, say, or on the fridge.
Highlighting the zero balance with yellow or pink marker drives home the point: I have paid down X dollars – look how much closer I am to my goal!
“That gives you momentum,” says Foss, founder and president of Empyrion Wealth Management in Roseville, California.
Foss also suggests that holders of rewards credit cards apply those reward points toward their balances, versus trading them in for gift cards or airline tickets.
Keep your eyes on the prize
Momentum matters, but don’t be surprised if your anti-debt resolve wavers a little now and then.
Think about the last diet or exercise regimen you tried. At first you felt confident, strong and happy to be taking charge of your health. After a while, though, you really wanted to sleep in or to go out for burgers and fries.
That’s natural. It’s also fatal, if you want to make any kind of progress. If you want this to be the year you really take charge of your money, remember two things:
- You didn’t get into debt overnight.
- It also takes time to whittle it down.
Try not to wallow in regret. Wishing you hadn’t spent all that money doesn’t do you much good. Instead, focus on the progress you make. Snowball those debts. Write their obits. And stay away from the Marlboros.
Marilyn Lewis contributed to this post.