Keeping up with the Joneses is a trap that many people fall into - although nowadays lifestyle creep feels more subtle than buying a new boat or big screen TV. It looks a lot more like upgrading your cellphone every year, ordering doordash when you are too tired to cook, getting a new car, and rolling the negative equity into your loan. Little by little, these choices add up and eat away at your income.
While most people don’t anticipate getting into debt, once you are in debt, it can feel hard (and even impossible) to get out of it.
The Cost of Credit Card Debt
If you are carrying large balances on credit cards or personal loans, paying an extra $20 or even $100 a month doesn’t feel like it’s going to make a dent in your debt. So, you continue to make minimum payments and spend that extra money on things that make you feel good now - new makeup, drinks with friends, etc.
According to TransUnion, the average American carries around $6,500 in credit card debt. While that number isn’t necessarily crippling, with interest rates averaging at 19%, carrying credit card debt will cost you a lot. Even if you pay $150 minimum each month, it will take you over six years to clear the balance and cost you more than $4,500 in interest.
However, with that same scenario, paying an extra $20 a month, drops your repayment timeline by a full year! If you add an extra $100 each month, you cut your payoff time by half and the interest paid by more than $2,500.
Choosing Debt Repayment
Once you’ve decided to get out of debt, there are two common repayment methods to explore.
The snowball method encourages you to organize your debts by balance owed, from least to most. Start paying the smallest balance first, while only paying the minimum amount towards the others. Once you have paid off a debt balance, you will roll whatever payment amount into the next highest debt, and so on. The thought here is to get a quick win for yourself and keep motivation high.
The avalanche method has you organize your debts by the highest interest rate. You pay off the highest interest rate first, thereby saving yourself money in the long run. If you have larger debt balances or debts all relatively the same amount, this may be a better strategy for you.
Other debt repayment suggestions include:
Signing up for automatic payments.
Sell items you are no longer using.
Use windfalls like tax returns and bonuses to help advance your payoff.
Only use cash or debit cards, don’t add to your existing balances.