With the Fed raising interest rates again before the end of the year, variable rate interest loans such as home equity lines of credit, variable rate student debt, and most importantly credit cards will be on the rise for 2019. The mean credit card debt of U.S. households is approximately $5,700 according to the most recent data from the Survey of Consumer Finances by the U.S. Federal Reserve. If you consider that credit cards can get into the 20% range for finance charges, this means that interest alone on credit cards could be more than $1,000 per household. If you don’t have your hands around your debt situation, here are my five smart money moves to crush your debt here in 2019.
- Understand How You Got Into Debt- There are lots of reasons that we can into debt. You should be asking yourself how this situation happened in the first place. Was it because you had some unusual one-time expense such as a medical bill or a significant purchase or has this been a slower systematic run up of debt? The reason this is an important question is to set the baseline as to whether you need to really hone in on your budget having better management of your income and expenses, or do you need to have a wholesale lifestyle change and potentially downsize your home. The crux of most debt either comes from overspending or lack of income and you need to determine if it is one of these or both.
- List Your Debts- The next step in the process is to list out each and every debt you have including your mortgage. You can list these by the total balance on each debt or by the interest rate each debt is charging you currently. Even though common wisdom would say to pay off the debt that has the highest current interest rate, my advice would be to start with the smallest balance first and pay that off. It’s important if you have a mountain to climb to get out of debt to get something in the win column. You may want to see if any of the debt can be refinanced to a lower rate or consolidated into one of your existing situations that already carries a lower rate.
- Consider A 0% Balance Transfer- If your track record permits, you should look to see where you can do a 0% balance transfer for your debt. Remember, every dollar in this scenario goes 100% to principal and none of your money is paid toward interest. However, you may not be able to qualify for one of these scenarios if your credit score is lacking, and this means you may also need to focus on fixing your credit score while you strategically pay down your debt. It’s important to understand how long the introductory rate is on the 0% balance transfer, so you don’t get surprised down the road if you don’t pay off all the debt by the time the introductory rate ends.
- Try To Earn Extra Cash- If you can’t cut expenses to pay off debt, that means you might want to start looking at earning extra income. Since we are fresh off the holiday season, are you sure you want to use those gift cards you received for the holidays which are likely to get you to only spend more money. You could check out a website such as Cardpool which will allow you to sell your gift cards and earn 70% to 90% of the face value of the card. You could take this cash and then immediately pay down your debt.
If you don’t have any skills to sell and need to earn extra money, try Survey Junkie where you can earn money to take surveys. If you can teach or offer something anywhere from drawing cartoons to teaching guitar, sign up for Fiverr where you can offer your services to other and get paid for your knowledge or time.
- Snowball Your Payments- The absolutely final key to crushing your debt in 2019 is to use the ‘snowball’ effect. If you are paying $75 a month on a credit card, when you finish paying that card off simply roll the $75 payment into your next debt and keep snowballing the monthly payments until you have paid off all of your debt. There is no better feeling financially then knowing you owe nobody at all.
Paying down debt can be a daunting task, and if you need help building an overall financial plan, be sure to check out www.oxygenfinancial.com for all of our great downloads. You can set up a complimentary meeting when you check out the site.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
CEO and Founder oXYGen Financial, Inc.