Now that the confetti has settled and the year has truly begun, people hoping to make big financial changes in 2016 will have to start getting serious. For those of you who want this to be the year you finally get out of debt – that means coming up with a plan on how you’re going to do it.
If getting out of debt were easy, we all would have done it already (and paying down debt remains a top concern for Canadians, says CIBC). The long march to being debt-free will include road bumps, setbacks, and a lot of things you didn’t anticipate. That’s why it can be helpful to have support and to go into the process with your eyes wide open.
That’s why I’m launching a twelve-month series of articles to help you throughout your 2016 debt-free journey. These articles will address key parts of the process from making a plan and coping with setbacks to making extra money and creating milestones to reward yourself along the journey.
But before you start out, here are four things you have to do:
1: Add It Up
If you want to get out of debt, the first thing you have to do is add up all your debt. Some people know exactly how much they owe at all times whereas others don’t even want to open their credit card statements. If you belong to the latter group, then the first step on your debt-free journey is to face the reality of your debt.
Calculate that number and write it on a big piece of paper in black marker. Put it somewhere where you can see it. As you pay down your debt every month you can update this figure and add another piece of paper showing how much you’ve already successfully paid off. This running tally will help motivate you to continue paying off your debt.
2: Make a Plan
The next thing you should do is figure out your strategy for paying off your debt. Calculate how much you will have to put towards the principal of your loan every month and divide it by twelve. Once you have that figure, look at your budget to see where you can cut back. If you can’t find enough money by cutting expenses, find ways you can make more money whether by taking on extra hours at work or finding a side hustle or part-time job.
Some people subscribe to the belief that the fastest way to get out of debt is to focus on paying off the account with the highest interest rate first. From a purely rational point of view, it makes sense to do so. By doing this you will pay less interest and less money overall.
But others say that psychologically this can be the wrong move. They believe that you should focus on the credit account with the lowest balance. By paying off that account first, you’ll feel a much greater sense of accomplishment which will motivate you to continue saving and paying off the rest of your debt. While you will pay more overall, you might be more likely to be successful.
Before you decide which method to choose, consider your personality and what motivates you. Also, know that it’s okay to be flexible and switch halfway through the year from one method to another if you find that it’s not working for you.
3: Refinance Your Debt
If you’re carrying your debt on credit cards or other high interest credit vehicles, you should also consider transferring or refinancing your debt in order to accelerate paying it off. The first thing you should consider doing is taking out a line of credit or home-equity line of credit (HELOC) and transfer the debt from your high interest credit cards to that relatively low interest credit line. This will reduce your interest expenses and allow you to put more money towards your debt every month.
Also read: How to Tackle High-Risk Debt>
If you don’t qualify for a line of credit, you can also potentially get a lower interest credit card or a credit card that offers you a zero percent interest or low interest introductory rate. Some companies offer these introductory rates for a few months but others offer them for as much of the year. This will help you pay off your debt more quickly.
4: Make Changes That Stick
When it comes to pursuing any New Year’s resolution, one of the biggest challenges people face is sticking to it. Paying off debt is a difficult resolution since it involves constant sacrifice over a long period of time. This can be incredibly draining and can lead to debt fatigue, where you become overwhelmed by the process of getting out of debt.
But there are strategies that have been shown to help people to stay motivated and achieve their goals. For example, consider getting an accountability buddy to check in with you at regular intervals to ensure that you’re on track to achieving your goal. Another great way to stay motivated is to set up rewards and small milestones during the debt repayment process so that you don’t feel overwhelmed by having to pay off the full amount.
One of the reasons why people abandon their resolutions is that they deviate from them and believe that they’ve failed. But instead of seeing the process of getting debt-free in 2016 as a black-and-white matter of either succeeding or failing, you should see it as an experiment.
In the book Change Anything by Joseph Grenny, David Maxfield, and Kerry Patterson, they show how people have been able to make huge changes in their lives. They found that there’s really no one way to be effective but that each person must find what works for them which takes into account things like personal, social and structural motivations. Since these motivations are different for each person – that means that we have to use trial and error in order to find strategies that fit our personality and motivation.
For example, maybe you have a hard time getting out of debt because you’ve convinced yourself that you have to cut out all luxuries from your life. After a few months you tire of having to give up your morning latte and that leads you to slack off on your debt repayment. But if your latte provides you with such a significant mental health boost, then you shouldn’t give it up. Instead, you should find other ways to cut back.
For example, you might want to automatically have a portion of your paycheck go into a savings account that you’ll use to pay off your debt so that it is never in your checking account and you will feel less tempted to spend it. This is one structural way you can reinforce your goal.
Also read: How Automating Your Savings Will Make You Richer>
To be successful, it’s key that you find strategies that work for you and that you feel confident that you’ll stick to, instead of strategies that other people tell you worked for them.
Do you have questions about paying down your debt? Tell us in a comment to have Amanda answer them in our 12 Months to Debt Free series!