Worried about paying off your debt? There is hope if you follow these tips
MINNETONKA, Minn. -- In the new year, many people face lingering debt from the holidays. Bill deadlines are quickly approaching and for some, getting out of debt might feel like an impossible feat.
But there is hope – Elijah Kovar, with Great Waters Financial, says the first step is accepting the reality of the situation and acknowledging that change is needed.
"Being money avoidant and not wanting to talk about these issues doesn't make it go away it just makes it worse," Kovar said. "So, acknowledging that change needs to happen is the first step to making progress."
Kovar knows the burden of debt firsthand. He said in his 20s, he and his wife spent a few years paying off debt.
"I'm a financial advisor and in our 20s my wife and I had a ton of credit card debt," he said. "We made bad decisions when we were young when we were 19, 20, 21, 22 and those bad decisions snowball in the wrong direction."
Kovar said paying down debt can be broken down into four steps:
- Assess your finances
- Calculate your debt
- Pick a strategy
- Create an emergency fund
After accepting your debt, you need to figure out where your money is currently going in order to tackle what you owe. If you don't, you might be tempted to use a credit card to pay off your current debt, which also traps you further.
Take a good look at your budget and spending habits: What do you need to spend to maintain your lifestyle? Then, look at where you can make adjustments.
"Understanding what's coming in every month what's coming out every month tells us how much we have to use and to save to pay down debt," Kovar said.
Next, calculate your debt. Get a clear picture of your outstanding bills and figure out the interest rates on all of your debt. This will help you make a goal and timeline for how quickly you can pay off your debt.
"There are three things we need to know our balances, our interest rates, and then what our monthly minimum payments are," Kovar said.
There are a number of strategies when it comes to paying off debt. According to Great Waters Financial, it doesn't matter what strategy you do as each debt situation is unique, but you need to pick one.
"Failure to plan is planning to fail, right," Kovar said.
Maybe it's the snowball method. This plan might provide some motivation. The method has you tackle the smallest debt first. Once smaller loans are paid off, you can put those monthly payments towards larger loans.
Or maybe the debt avalanche strategy is what will work for you. This plan has you pay off the loan with the highest interest rate first. It helps reduce the amount of interest you owe, meaning the amount of money you owe.
Another method is to consolidate their loans to create a fixed timeline and monthly payment.
Lastly, or maybe firstly, create an "emergency fund." Kovar recommends putting away $1,000 to $3,000 in a separate savings account. It's a good idea to establish this before you start tackling debt, that way if you do come across an unplanned purchase--living in Minnesota, it could just be some icy roads--you can pay with cash, rather than using your credit card.
"Put down the shovel if you don't want to dig any deeper. Put down the credit card," Kovar said.
No matter what your situation is, Kovar assures there is a way out.
"The thing is you're not alone. A lot of people that you wouldn't expect have been in debt had credit card problems," Kovar said.