When it comes to finance management, nothing weighs down your cash flow quite like debt. Though the process can feel overwhelming, it’s essential to kick your debt to the curb as quickly as possible for both your own well-being and the health of your business. Start by following these five steps to turn your financial situation around and get your business back in the black.
Step 1: Understand What Kind of Debt You Have
You can’t make progress toward a goal if you don’t have a clear starting point. In this case, your goal is debt freedom — and your starting point is knowing how much debt you have and where it’s coming from.
Make a list of all your debts. You’ll want to include:
- The source of the debt: Is it a student loan? A credit card? An auto loan?
- The remainder you have to pay on each balance
- The minimum monthly payments
- The interest rate on each balance
Don’t panic. It may feel overwhelming to look at all your debt in one place, but doing so is the first step toward a strategic plan to get rid of every last bit of it.
Step 2: Get Organized
Now it’s time to organize the list you just made. “You can use a spreadsheet or a personal finance program to see ‘how big the elephant is,'” explains Jim Blankenship, CFP. He also points out that you can use either method to monitor your progress on an ongoing basis.
There are two main ways to organize your debt:
- List your debts in order of interest rate, with the highest interest rate at the top of the list.
- List your debts by remaining balance, with the lowest balance at the top of the list.
By organizing your debts in this way, you can develop a strategy to start paying them off one by one. When determining how to organize your own list, think about which structure will motivate you more.
Step 3: Choose a Debt Repayment Strategy
If you want to pay off your debts as cheaply as possible, list them by interest rate with the highest one first. Interest is what costs you money on your debt. The longer you hang on to that balance, the more your debt will cost you. Paying off the highest debt first is the most financially efficient option, since you’ll eliminate the debt that’s accruing the most interest.
On the other hand, it may be tough to stay motivated if it’s taking you a long time to pay off one big balance. If you’re more likely to stick to your plan when you can consistently cross out debts, start with the lowest balance first. Just remember that focusing on the smallest debt first could cost more in the long run, because the lowest balances may not have the highest interest rates.
Step 4: Make Minimum Payments No Matter What
Regardless of the debt repayment strategy you use in your personal finance management, you need to keep making at least the minimum payments on all balances. Then, put some extra toward the particular debt you want to focus on first.
Once that first debt is repaid, take the monthly payment you made on the balance and combine it with the minimum monthly payment on the next debt you want to knock out, and so on. This accelerates how fast you pay off all your debts as you go. Since you’re using money that you were already putting toward loans anyways, you won’t miss it.
Struggling to find the money? Cut the frivolous, mindless spending, says Hilary Hendershott, CFP. Hendershott suggests eliminating recurring expenses and challenging yourself to use just half your income to pay for discretionary expenses throughout the month.
“You’ll be surprised to discover how much wasteful spending you’re doing,” she says, explaining that cutting back on spending should free up more income to put toward debt repayment. “If you take the time to spend only on what you most value, you’ll still be able to maximize your happiness.”
Step 5: Look Into Other Options
Depending on your situation, it may help to refinance your loans or consolidate your debt. The right move depends on the current state of your finances and the kind of debt you have.
You may want to consider refinancing if:
- You could get a significantly lower interest rate on your loan — enough to offset the fees associated with refinancing.
- You won’t lose any protections or benefits by refinancing. Some student loans, for example, come with borrower protections you’d lose when refinancing.
You may want to think about debt consolidation if:
- You have a lot of different balances and you struggle to track all the payments — which leads to missed or late payments.
- You could get a significantly lower interest rate on the new loan you’ll have after consolidation.
- You won’t lose any borrower protections or benefits by consolidating.
- If you transfer a balance to a 0 percent APR card, know when that rate expires. Most 0 percent offers are only good for 12 to 18 months, so plan to pay off your balance before that.
- Never miss a payment. Depending on the card, the terms and conditions could state that missing a payment or making a late payment ends the 0 percent APR offer — and you’ll likely owe interest on the entire balance.
When you feel overwhelmed by debt, take a step back and assess the situation. Fortunately, there are a few routes you can take to manage and pay down your debt. If one doesn’t work for you, there are plenty more options to try. Follow these tips and you’ll be well on your way to debt freedom and a better personal financial situation.