How to Spring Clean Your Debt
Spring cleaning isn’t just about hauling out the junk from your basement or purging documents from your home office desk. It’s also about cleaning up debt that you’ve racked up from home mortgages, business loans, credit and debit cards, etc. Fortunately, it’s not as physically exhausting as spring cleaning the household. Here are seven ways to spring clean your debt and come off squeaky clean:
Evaluate Your Current Financial Situation
How much is your outstanding balance and how much are you getting charged in monthly interest? Do comparison shopping on what you’re paying for in interest right now versus the refinancing options available. Try renegotiating your loan terms with your credit card provider or mortgage company to lower the rates. If you want to capitalize on the zero percent balance transfers that are offered year round, you need to be able to pay off the full balance amount prior expiration of the promotional period.
Slowly Pay Off Debt
It’s a common question in the debt community – do you pay off the highest interest loan first or go for the smaller ones? While starting with the loans bearing the highest interest rate sounds like common sense, studies show that people are more inclined to stay on track of their debt reduction plan if they can systematically knock the smaller loans out of the way. Dave Ramsey, a personal finance expert, calls this phenomena as the “snowball” approach.
Keep Your Budget Up to Date
If you’ve gone through a major career change, such as getting a promotion or getting laid off, your budget plan should reflect this said change. Failure to account for these changes in your financial situation will make your budget plan ineffective and irrelevant. Keeping your budget up to date will bring to light any weak areas that you should be fortifying, such as a negative balance between income and expenses, or opportunities that you can take advantage of, such as a pay raise that should be allocated towards paying off a debt in full.
Set Up Auto Payments For Bills
Automatic bill payments reduce the chance of missing a periodic payment and getting charged by your lender for the failed transaction plus late fees. Another benefit of setting up your accounts to pay bills at a pre-determined schedule also makes it more convenient to manage your financial obligations. If you set up auto pay through your bank, for instance, your bills can be managed and viewed in a single centralized location. Rather than you having to mail money to them every month, they can simply take the cash from your account.
Consider Debt Consolidation
Debt consolidation pertains to the rolling of multiple individual loans into one lump sum. This allows you to make a single monthly payment rather than have to pay off multiple loans every month. Consolidating your debt into one loan has several benefits including the fact that it can effectively lower your monthly interest rate. That being said, consider the fact that if you do decide to extend the repayment term, it could take you a protracted period of time to pay off the entirety of your loan.
Switch to a More Frugal Lifestyle
Paying off debt is just half the uphill battle to financial security; the other half is learning how to keep debt at bay. A more frugal lifestyle means cutting back on anything that is considered an expense, such as entertainment magazine subscriptions, movie nights, five-star restaurant dining, or your frequent trips to the cafe for coffee. If you can live a modest quality of life without it, consider dropping it from your monthly budget.
Don’t Forget to Have Fun
Erasing all unnecessary expenses and devoting majority of your budget into paying off debt can make life more stressful or at least less enjoyable. Don’t forget to have fun by taking a day trip after you’ve repaid a certain amount of your loan or treating yourself to a nice relaxing day at the spa after your investment portfolio has produced a certain ROI percentage. These healthy pauses will help boost your motivation and keep you on the right long-term track.
Final Thoughts
Just like how you shouldn’t postpone spring-cleaning your work desk or your household garage, you shouldn’t delay paying off debt and improving your financial situation. Use the seven tips above to help you clean debt, not just for the Spring season but for the years to come.