It's hard to feel like you can save and invest in your future when you are saddled down by debt. Paying off debt can make it much easier to focus on savings for your future. Paying off your debt doesn't happen, though, without focus and dedication.
#1: Create a Debt Inventory
The first thing that you need to do is create a debt inventory.
Start with utility debt – are you on a payment plan for any of your utility bills? Include any utility bills you are behind in your debt inventory.
Next, make a list of how much you owe on any credit cards, student loans, and car loans. If you have personal loans that you owe friends or family members, be sure to put them on your debt inventory list. This is all debt.
#2: Start with Utility Debt
It can be hard to get ahead if you are always facing late-payment fees or payment plans for everyday bills, such as your electric bill, water bill, or other utility bills. If you find yourself on a payment plan for these everyday bills, prioritize paying these off first, so you're not facing extra fees. You are going to want to dedicate any money you have outside of the necessities to getting your utility bills under control.
#3: Set up Automatic Payments
For all of your other debt, from your credit cards to student loans to car loans, set up automatic payments. That way, you can ensure that you are paying at least the minimum due on these debts every month, which will help you protect your credit score rating.
You should also set up automatic payments for your personal loans. If you owe your parents a set amount of money, set it up so that your bank sends them a check every month. Even if you can only send them a small amount, you'll start making progress on that debt as well. It's important to pay off and honor all debt, regardless of whether it impacts your credit score or not.
#4: Pick a Big Debt to Pay Down
Once you have your utility debt paid off, you are going to want to pick another debt to pay down. Some people start with their smallest debt as it gives them a sense of accomplishment, and others start with their highest interest loan so that they don't pay more for that debt over time.
Both of these approaches work; it is really about the type of debt that you have. Sometimes, both of these criteria may be true. Your lowest amount of debt and highest interest rate could be tied to credit card debt, so you may be able to tackle both of these objectives at once.
Keep in mind that when you lower your credit card debt, it shows on your credit report that you are not maxing out your credit cards, which can have a positive impact on your credit score. It also gives you access to lines of credits if you really need them.
Getting out of debt starts with making a plan. Figure out what debt you have, starting with your utility bills, and then move to paying off more traditional forms of debt, such as credit cards and loans. Be sure to continue to contribute to your employer-sponsored retirement fund and emergency fund as you pay off your debt.
To learn more about smart financial planning, talk to companies like Monheit Zongolowicz Frisch CPAs.
