Any time is a great opportunity to make some big life changes. While everyone else might be pledging to exercise every day or live more sustainably, taking the chance to lower your debt is an excellent resolution to work towards.
When the average American family owes over $6,000 across different credit card accounts, many of us have come to accept that living with debt is simply a way of life. But that doesn’t have to be the case.
Not sure where to start? Take a look at our top tips for facing your fears and turning over a new leaf when it comes to lowering your debt this year.
Revise Your Budget
Working with what you already have is always the best place to begin. Sit down with your existing budget and see what revisions you can make to fit in a more robust debt reduction plan. If you’ve never made a budget before, this is also a great time to start one.
You might find that cutting some of those larger luxury expenses, like saving for a big vacation, could make a significant dent in your debt plan. Consider taking everything you’ve saved for that goal so far and putting it towards your debt. Seeing a large chunk taken out of what you owe can be incredibly motivating as you try to pay off the rest.
But don’t just rely on taking away from other goals in order to chip away at your debt. Life is for living and while you may need to rein it in somewhere, you should also make sure that you’re enjoying well-deserved rest or small pick-me-ups along the way.
Start looking for the “nice to haves” or unnecessary subscriptions that aren’t being used. Do you really need a gym membership when you have a treadmill in your basement? Does your family have time to watch all of the different streaming services that you subscribe to? Entertainment costs like dining out can add up quickly. It’s worth looking at what you typically spend in a month on these categories and allocating some of those funds to your debt repayment instead.
If both yourself and your partner are now working from home long-term as a result of the pandemic, it might be time to reconsider the number of vehicles that your family owns. You can save significant money over the year by ending a car lease, paying off a car loan early, and moving down to a single-vehicle auto insurance plan.
Consolidate Your Debt
When you’re balancing multiple loans, remembering where you stand with each of them can get confusing quickly. Not only that, but you’re likely facing a whole range of different interest rates. Taking out personal loans as a means of debt consolidation can be a cost-effective strategy that saves you money long term.
When you take out a personal loan, these funds can be used to pay off your existing debts across multiple lenders. You’ll then only be responsible for one single loan repayment, with one interest rate. While this can work for many different types of loans, this strategy is helpful for bigger debts like student loans or car loans which may be split across several different providers.
Refinance Your Debt
For your biggest debts, like your mortgage, looking into home refinancing options is a smart move. While interest rates are low is the perfect time to consider refinancing. This is where you use a new mortgage loan to pay off your existing mortgage. Essentially, you’re switching from one mortgage provider to another to pay less interest over the lifetime of your loan.
Capitalizing on low-interest rates is always a great way to lower your overall debt. But it’s not only in advantageous markets that this can happen. If you recently got a new job or promotion, combined finances with a partner, or inherited a lump sum, you may now be in a better position to get a lower interest mortgage.
Cash-out refinancing to pay off other debt may also be possible, along with refinancing or consolidating any private student loans that you have. Talk to your loan provider before making a decision to see if this could be an effective way of lowering your debt.
Take Advantage of Home Equity
With lending rates so low, now is a good time to take advantage of the equity that you’ve already built in your home. Home equity loans or a home equity line of credit could provide you with the money that you need to pay off other debts.
There are risks involved that you should be aware of before taking out a home equity loan. With your house as collateral, you risk foreclosure if you find yourself unable to repay your loan. You could also end up owing more than your loan is worth if the value of your property drops during the lifetime of the loan.
It’s certainly worth considering a home equity loan but always speak to a professional first to determine if there are other options open to you that are slightly less risky. Read "How Does A Home Equity Loan Work" to learn more.
Consolidate Your Credit Cards
The largest amount of debt, besides mortgages and student loans, that most people hold is credit card debt. The average American has 3.84 credit card accounts and a balance of around $5,000.
Before you can think about consolidating or paying off your credit cards, the first step is to stop accruing new debt. Think about placing a freeze on your card if the temptation is too great. This also helps to prevent your credit utilization from getting any higher–this is the percentage of available credit that you’ve used up. Staying below 10% should be your goal.
If your shopping habits have changed as a result of the pandemic, now is also a great time to cut some of your store-based credit cards. Look into new credit card options that are available to you with your current credit score and see if they have a balance transfer option.
Some credit cards run promotions throughout the year that offer excellent rates on balance transfers to encourage you to sign up. If possible, open a low-interest credit card and use this to pay off the rest of your existing credit card debt. Just like with mortgage refinancing or other loan consolidation, this will keep your repayments to one lender and one interest rate.
Be Prepared for the Unexpected
While we never know what’s around the corner, taking steps to prepare for an emergency or unanticipated expense is always sensible. Alongside your debt repayment plan, try to work some additional savings into your budget for a “rainy day fund.” This money can help to keep you out of medical debt or feel like you’re forced to rely on more loans to stay afloat.
There’s different advice out there about how much money you should have in your emergency fund, but the most commonly suggested amount is around 3-6 months of living expenses. If you’ve never saved anywhere close to this amount before or are already facing a large debt repayment, this can seem quite daunting.
Instead, break this down into more manageable goals. Can you save $1,000 over the next couple of months? Once you’ve hit that goal, try for another $1,000. Building up savings takes time, but you’ll feel incredibly proud of the efforts you’ve made. If you’re paying down debt at the same time, that’s an even bigger accomplishment.
What’s The Best Strategy to Lower Your Debt?
So many of the best debt reduction strategies come down to being organized and proactive about your finances. You may be taking baby steps to pay down what you owe, but every penny counts. Not only do strategies like consolidating and refinancing help you to save money, they’ll also make managing your money easier to handle.
But we don’t expect you to know how to do all of this on your own. That’s what we’re here for. Contact a representative at Muncy Bank today to discuss your savings and lending options. Our experts are here to help you decide on the right strategy for your personal situation and make this year your best financial year yet.