Just like having a plan for saving is important, so is having a plan to pay down your debt. Recent reports show that individuals have increased their usage of credit cards due to the ongoing inflation and rising costs of basic needs like housing, food, and transportation. Couple that with the return of student loan debt repayment and the interest rate increase, and the ability to pay down debt is exacerbating the saving crisis, hindering the ability to remain financially stable for many Americans.
But this debt doesnโt have to be forever. Hereโs the secret: The only way to relieve the financial stress of debt is take make a plan to reduce itโฆ and stick to it.
To come up with that plan, though, you first have to understand the type of debt you have and your best-case scenario to pay it down while maintaining or increasing your credit score.
Hereโs some steps to help kick-start your plan of reducing debt:
Get a clear view of your finances: Believe it or not, budgeting is not the first step. In order to create a spending and savings plan, you first need clarity on your financial situation. Know your exact income and expenses on either a weekly or monthly basis, determine how much is left over after your bills are paid, and set a solid portion of that to go towards paying down debt. Even if itโs a small amount left over, put it in savings. Remember, there is no amount too small to save!
Work with what you have: This one should be no surprise โ when youโre working to pay down debt, you shouldnโt be adding to it. Unless there is a special or emergency circumstance, avoid putting purchases of a significant amount on your credit card. This includes โbuy now, pay laterโ options when online shopping. Though it may not feel like it, these lead to debt and should be treated as such.
Choose a strategy that works for you: Thereโs a variety of strategies you can employ when working towards minimizing debt, whether itโs one you created or found through research. Popular methods include:
- The snowball method, or โsnowballingโ your debt, is an accelerated debt repayment plan. First, list all of your debts from the smallest balance to the largest balance. Next, make the minimum payment on all your debt except the smallest one. With your smallest debt, you will put as much money as you can toward the balance. Once the smallest debt is paid, take the amount you were putting towards that debt and apply it to the next smallest. With this method, interest rates are not the focus.
- With the avalanche method, you will still make the minimum payments on every source of debt, but you apply the remaining funds toward the debt with the highest interest rate. By paying off the debt with the highest interest rate first, you reduce the overall amount of interest you pay.
This blog is part of Penn Community Bankโs celebration of America Saves Week – an annual celebration and call to action for everyday Americans to commit to saving successfully. Together with thousands of participating financial institutions and community organizations, we encourage local communities to do a wellness check on their finances and make a plan to achieve better financial stability.
