How to make a plan and start paying off your debt.

According to a late 2023 study from Experian, Americans are now carrying over $17.1 trillion in consumer debt, which includes mortgages, auto loans, home equity loans, student loans, credit card balances, and more.¹ And this number continues to increase as daily living expenses and inflation impact household budgets.

Being in debt can make it difficult to achieve your other financial goals because the money you could put in savings each month is being used for loan payments, interest charges, and even late fees. Conquering your debt can have a big impact on your overall financial wellbeing.

Make a list of your debts.

Before you can start tackling your debt, you need to take inventory of all the debt you have. Write down the due dates, payoff amounts, and minimum payments for each loan type. Visually seeing this information will help you prioritize how you want to pay off your debt and which loan makes sense to tackle first.

Review your budget.

Creating a budget is the easiest way to take control of your finances. Planning ahead and looking at your upcoming expenses can help you visually see where your money is going every month. Getting into the habit of creating a budget can help you identify specific areas where you’re spending too much. Then you can determine which categories of spending to cut back on. If you’re having a hard time finding ways to save, consider:

• Can you cut a streaming service or two for a few months?
• When was the last time you negotiated your phone, internet, or cable rate?
• Do you plan meals, make a list, or clip digital coupons before you go grocery shopping?
• Can you turn down your thermostat a few degrees in the winter and limit how much you run the air conditioner in the summer?
  
  

You can apply any money you save in your budget toward your debt. Whether it’s just five dollars or as much as five hundred dollars, making extra payments or paying over the minimum payment on your debts can help you save money on interest charges and pay it off faster.

If you’re still struggling to cut back, it might be time to consider a side gig or part-time work. Increasing your income might be the key to reducing financial stress and paying off your debt.

Create a plan.

Now that you’ve listed all your debts and reviewed your monthly budget, it’s time to create a plan to pay off your loans. The debt avalanche method and the debt snowball method are two common debt repayment strategies. Let’s go through these two strategies using the following debt examples. Say you have a:

1. $9,500 car loan with a rate of 7.8% APR (Annual Percentage Rate)
2. $30,000 student loan with a rate of 6% APR
3. $15,000 in credit card debt with a rate of 15% APR
   
   

The debt avalanche method focuses on paying off the loan with the highest interest rate first.² So, in the scenario above, you’d make the minimum payment on all the loans and put any extra money from your budget on the credit card. By paying off the debt with the highest interest rate first, you could save money over time by paying less interest charges so you can work on paying off your other debt sooner. However, this method requires quite a bit of discipline and may be hard to do if you don’t have extra funds in your budget to apply to your debt.

The debt snowball method emphasizes paying off the debt with the smallest balance first.² Using the debts listed above, you’d put any additional funds toward the car loan and pay that debt off first. After you pay off the car loan, you’d focus on reducing the credit card debt. The funds budgeted for the car payment could then be applied toward your credit card to pay the balance down faster.

For example, say you pay $400 per month on your car payment and $100 on your credit card. After you pay off the car loan, you’d then pay $500 per month on the credit card. It may take a little longer to reduce your debt with this method, but it can help you stay motivated as you see your loans eliminated.

Look at your budget, your goals, and your timeline to determine which debt payoff method will work best for you.

Consider your options.

Besides simply putting money toward your debts, it might be beneficial to explore more debt payoff options, like:

• Refinancing your loans could help you get a lower interest rate with lower monthly payments. Depending on the loan type, there may be closing costs involved, so consider these costs before pursuing a refinance.
  
  
• Consolidating multiple loans into one loan (like a personal loan) could make it easier to keep track of payments, lower your interest rate, or reduce your monthly payments.
  
  
• If you have multiple credit cards, look out for balance transfer offers. When you move the balance of one card to another, you might get a low rate on the transferred balance for a specific period. Like refinancing, you need to consider the costs of a balance transfer and be diligent about paying off this amount before the promotion period ends.
  
  

If you’re having trouble making your loan payments, contact the organization or financial institution that services your loan and ask about lowering your payment. Your creditors may offer payment plans or other options that work better with your budget.

Lake Trust members also have access to resources from our partners at Greenpath™ Financial Wellness³. The specialists at Greenpath™ can help you create a debt repayment plan, review your credit, or offer debt counseling services.

You have the power.

It takes determination (and even a little courage) to decide to take control of your money and work on reducing or eliminating your debt. Not only can reducing your debt free up funds to put toward other expenses or goals, but it can enhance your emotional wellbeing. Imagine what it would feel like to have no debt.

It is possible to be debt-free, but it takes discipline and a positive mindset to achieve this goal. We believe in you. And we’re here to support you every step of the way.

¹Horymski, C. (2024, February 14). Experian Study: Average U.S. Consumer Debt and Statistics. Experian. Retrieved from https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/

²Eneriz, A. (2023, December 20). Debt Avalanche vs. Debt Snowball: What’s The Difference? Investopedia. Retrieved from https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp#toc-debt-avalanche

³Third party website. Lake Trust Credit Union is not responsible for the content, availability, security or compliance of any linked third party websites. In addition, the site's privacy policies may differ from those of Lake Trust.