DEBT | DEC 21, 2021

New Year, Less Debt

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Rob West and Jim Henry

The New Year is upon us and you know what that means. It’s time to finalize your 2022 resolutions.

Anyone can make New Year’s resolutions. Keeping them is the hard part. There is one resolution, however, that you’ll never regret keeping.

If you’re trying to decide how many pounds you want to lose in the coming year (a worthy endeavor, to be sure), why not add something else to your list of resolutions? In addition to reducing your waistline, how about reducing your debt?

For many people, the thought of getting out of debt is overwhelming, so they don’t try or they give up too easily. You don’t have to do it all at once. The important thing is to set a realistic goal and get started.

Focus only on consumer debt (credit cards and auto loans), not your mortgage. If you can’t see yourself getting completely out of consumer debt in the next 12 months, consider some amount of progress instead.

The first thing you need to do is write down all of your debts and their amounts. Pull out all of your credit card statements, auto loans, and outstanding bills. Then total it up. That’s never a fun thing to do, but it’s essential.

When you’ve totaled up your debt, make a plan to pay off some part of it. Start by figuring out where you can trim spending from your budget to create margin. That’s money left over after all necessary spending.

Of course, if you’re not on a budget you’ll need to draw one up. If you need help setting up a spending plan, sign up with one of our volunteer coaches.

You can also download the MoneyWise app wherever you get your apps. It’s based on the tried and true envelope system, and it makes setting up a budget a snap.

Now that you know how much money you have to attack your debt each month, continue to pay the minimum due on each debt, but take your “surplus” money and put it toward the smallest debt each month. This is the “snowball method’ for paying off debt.

When the smallest debt is paid off, take your surplus money (you’ll have a bit more of it now) and apply it to the next smallest debt. When that’s paid off, repeat the process.

You’ll begin to pay off debt faster and faster, like a snowball getting bigger and gathering speed as it goes downhill. As each debt is paid off, you have more and more money to apply to the remaining debt.

To be successful, you must also resolve to not take on new debt. Otherwise you’ll undo any progress you’ve made. Stop using your credit cards. If you can’t do that, cut them in half.

Remember to choose an amount that you can reasonably expect to pay off in the next 12 months. That may not be all of your consumer debt. Maybe it’s only a thousand dollars, or two, or three. It has to be a goal you can reach.

Researchers say that 90% of people making New Year’s resolutions fail to keep them. Do the steps we’ve laid out and you’re likely to be in the 10% that do.

You can listen to th e related podcast on this topic.

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