How do I regain control of my debt?
<div class="user-question">Hi Frich! My debt is making me incredibly anxious… I know if I want to pay off my debt faster I need to pay more than just the monthly minimum payments, but I feel like those payments are already eating up a ton of my budget and it’s hard to know what debt to pay off first. I’m in about $8,000 of credit card debt across 3 different cards, and my student loan balance is right around $90,000. I’d love any advice on how to make a debt payoff plan! For reference - I make 70k/year.</div>
Hi Frich team! I'm Erin & I've built my career helping people live a fun yet financially responsible life🤝 And nothing says living financially responsibly like managing your debt properly. So let's dive into your question!
Debt can be overwhelming because the interest can make it feel like you’re climbing a steep uphill battle. But the good news is, you’re already taking a huge first step in seeking out help and making a plan to become debt free!
Step 1: Understand Your Debt Position
It sounds like you’re already familiar with the balances of your different loans, but centralizing all of that information is a great place to start when making a plan! Getting out of debt can feel daunting when you’re trying to balance loans in a lot of different places (your student loans, credit cards, etc are all with different providers, on different platforms and all have different due dates throughout the month) so a good place to start is to gather the following information about each loan:
- Total balance: how much debt have you accrued so far for each loan?
- Interest rate: the amount of money you’re paying the banks on an annual basis
- Fixed or variable rate: is this rate fixed or variable? Some loans have “variable” rates meaning the rate could change in an instant! It’s important to pay attention to a variable rate if you have one.
I personally use the Ditch app to centralize my debt and see all of this info in one place!
For this example we’re going to assume the interest rates on your loans are 25% for the credit card debt and 4.5% for the student loan debt. Your approximate monthly payments are the following:
- Credit cards: minimum payments of $100 per month on each card ($300 per month total)
- Student loans: $943 per month on a 10 year repayment cycle.
<div class="frich-tip">Take a look here if you qualify for any debt relief options!</div>
Step 2: Monthly Budget Review
Don’t let the word “budget” scare you, it’s nothing more than creating a plan for your money which can (and should!) include your debt payoff plan.
A good place to start is to track your income and expenses to see where your money’s going. I like to suggest looking at your last full month’s worth of expenses and see how much you spent. What was the spread between your income and your expenses when you weren’t necessarily paying attention to your money? A few tips:
1️⃣ How does your current spending compare to the 50/30/20 budget framework?
This budget method suggests 50% of your income should go toward needs, 30% toward wants, and 20% toward your financial goals (saving, debt payoff, etc). This framework can help you get a better idea of what aspect of your budget you should try to focus on. For example, if your “needs” are closer to 70-80% of your budget, how can you cut back on the big fixed expenses that are eating up most of your money?
2️⃣ Use this data to see which areas of your spending you really value and which you don’t.
If you noticed you spent $500 on restaurants last month and that doesn’t feel good to you, maybe you don’t value eating out as much as you think you do and this is an area you can focus on cutting back moving forward. Creating a plan for your money includes spending your money on things that you truly value!
Step 3: Set a Realistic Debt Payoff Goal
How can we increase the amount of money we’re allocating toward debt payoff in our budget every month? After you’ve reviewed your expenses it’s time to set a budget for the coming months while we tackle paying off our debt.
- Income: $70,000/year = roughly $4,858 after taxes.
- Fixed costs: $1,243 of your monthly budget is already going toward your debt leaving $3,715 left monthly.
Focus on small changes in your spending to leave money left over to apply toward your debt.
Step 4: Prioritize Your Debt
With $8,000 in credit card debt and $90,000 in student loans, it’s important to prioritize which debt to make extra payments to.
Your credit card debt has significantly higher interest rates than your student loan debt, which is a good case for considering making extra payments toward the credit cards as opposed to your student loan debt. For example:
A Frich-approved plan could look like focusing on paying at least $350 per month onto your credit card debt to pay it off in two years or less. Then after those two years, apply that amount toward extra payments onto your student loan to save thousands in interest on that debt as well. By focusing on eliminating high interest debt first, you can reduce the total amount of interest paid throughout the life of your loans!
This example focuses on only an extra $50 a month applied toward your debt - imagine what $200 can do for your debt payoff plan!
The Ditch app gives you a seamless way to do so. Enable the Payoffs feature to round up all of your purchases and apply that extra money toward your debt. Ditch users on average pay an extra $200 a month toward their debt which results in HUGE interest savings over time!
Btw - here's how others are doing👀
You can pick just one, which one is it?
🎓24% All your student loans paid off
🏡42% You can afford to buy a house
🌴34% Have enough money to retire by 40
Good luck with your debt payments! And we hope that this made you feel more in control.
- Erin Confortini
