A lot can happen in a year. You can get a new job, pick up a new hobby or, just maybe, you can finally pay off your debt.
Many people have the motivation to tackle that last one: The average U.S. household with revolving credit card debt has an estimated balance of $6,849, costing an average of $1,162 in annual interest, according to NerdWallet’s 2019 household credit card debt study.
If you hope to dig out from debt in the new year, boost your chance of success. Start with some smart groundwork, then focus on what’s driving your goal and what you can achieve monthly.
Set yourself up for success
Before you set your specific debt-payoff goal, lay the groundwork so you can achieve your ambitions.
This means at least roughing out a budget and getting to know the details of your debt. Look through your bank statements to see how much money you have coming in and where it goes monthly. Separately, put together a list of your debts, including their balances, monthly payments and interest rates.
“In many cases, people don’t have a budget at all, or it’s been a while since they paid attention to their expenses,” says Lauren Anastasio, a certified financial planner at SoFi, an online lender. “The reason [a budget] is so important is it’s the way to really be honest with yourself.”
And when drafting your budget, don’t skip monthly savings because you’re laser-focused on debt. Tania Brown, a Georgia-based CFP with Financial Finesse, calls savings “debt-free insurance.” Her advice: “Make sure you have at least $1,000 in savings” before diving head-first into debt payoff. “If you don’t have savings, the first unexpected expense can put you back into debt.”
Look at what money you have left after covering basic expenses (housing, utilities, etc.) as well as savings and minimum debt payments. That’s the amount you can funnel toward accelerating debt payoff.
Make a resolution you can achieve
Now that you have a detailed understanding of your finances, use it to craft the right goal for your circumstances — and understand what motivates your debt payoff.
Rather than focusing on the grand total of what you owe, center your goal on what you can pay monthly. That way, you can create a resolution that works for your budget. If you owe $10,000 in credit card debt, but you can afford $500 a month toward your debt, you’ll still be able to pay off $6,000 over the course of the year.
“Maybe paying off your debt in one year isn’t a realistic goal,” says Paul Golden, managing director of communications at the nonprofit National Endowment for Financial Education. “Have a realistic expectation so you don’t get frustrated if you can’t actually achieve that.”
With your numbers in order, turn inward for a little self-reflection. Ask yourself what life goals are motivating your payoff resolution.
“If you don’t have a compelling reason why you’re paying off your debt, you won’t have the discipline to pay it off,” Brown says. “Think about what this debt is not allowing you to do and what you would do with that money you’re paying toward your debt.”
Find a debt-payoff strategy that works for your personality and your debt. Here are a couple of common methods:
- Debt snowball: With this method, you pay off your smallest debts first. Focus all the additional money you’re putting toward debt reduction on your smallest debt balance while paying minimums on the rest. When the first debt is wiped out, roll what you paid toward it into the next, much like a snowball rolling downhill. The debt snowball is a good option if you have multiple debts and want quick wins to stay encouraged.
- Debt consolidation: Paying down high-interest credit cards and have a high credit score? You might be a good candidate for a balance transfer credit card. Many of these cards have promotional periods with 0% APR. You’ll be able to pay off transferred balances faster because all of your payment goes to debt rather than interest.
Whichever method you choose, try to make hitting your monthly payoff goals easier for yourself by automating payments. The less effort it takes for you to pay off your debt, the easier it will be to achieve your resolution.