Millennials have an average of $28,000 in debt. As a Millennial myself, I care about my financial wellbeing. So much that I’ve had to make a few sacrifices to pay down my debt. So far, I’ve managed to pay off dental bills that totaled approximately $1,500 and two student loans. I do not have any credit card debt (thank God!) and I plan to pay off the rest of my student loans and my car in the next two years (or less).
Paying debt can be an overwhelming hurdle when we don’t know where to start. We can even feel defeated by our debt and will just accept it. But you will never regret getting out of debt. Personally, I want to experience the total freedom that comes with knowing that I owe nothing to anyone. Here are four strategies that have helped me to pay down my debt faster:
1. Determine which debt to pay off first
Prioritizing debt is useful to keep from getting too overwhelmed by the numbers. Make a list of all debts, interest rates, and monthly payments. Then choose which debt you’d like to focus on first. Two years ago, I prioritized my dental debt to take advantage of the interest-free period provided by my dental office. I paid it down aggressively and made extra payments when I could.
How do you choose which debt to pay off first? This is where you’ll have to make considerations. You can focus on eliminating your smallest debt (to simply get it out of the way) or focus on the debt with the highest interest rate (to reduce the overall amount owed). For millennials with credit card debt, it’s better to start there first because those cards come with high annual percentage rates (APRs) and offer less flexibility with payments. It may also be better to focus on private student loans over federal student loans for the same reasons.
Keep in mind that although you’re focusing on one debt to eliminate, make sure that you’re still making payments on your other bills/debts as well. Once you have paid off a specific debt, you can then roll over that freed money towards the next debt.
2. Make manual payments
My advice on making manual payments towards debt may go against the grain. The truth is, convenience is expensive. And while autopay is super convenient, it may not be the best option for paying off debt faster. This because with autopay, it is much easier to lose track of what you owe or how much you are paying. It may even cause you to become complacent with your bills! You also run the risk of overdrafting if you don’t have the money in your account (see tip #3). Manual payments can help you gain more control over your finances. With every manual payment, I can decide how much of my money will go towards my balances. I can also review any discrepancies or errors in my statements.
Another major benefit of manual pay is that you can target specific debt by making extra payments. In fact, student loan service providers recommend you log onto your account(s) in order to target specific loans. Why is this good to know? For example, when you pay $250 towards your loans through autopay (Direct Debit), your loan provider has the right to apply that payment towards your loans however they see fit. As a result, you could be missing out on the opportunity to pay off your smallest loan or even the loan with the highest interest rate. So take advantage of making manual payments!
3. Pay your bills when they arrive, not when they’re due
Many millennials stay in debt because they are late or make inconsistent payments, or cannot make the payments by the time their due date has arrived. I am a big proponent of making payments before they are due. In order to get out of debt, you need to prioritize debt repayments–not procrastinate on them! The average APR for credit cards is 17% in the United States, which can add up quickly to unpaid credit card balances. These creditors do not care if you miss a payment. Why? Because they can now charge you interest and penalty fees. And interest and penalty fees are how creditors make money.
As I’ve mentioned before, manual payments can help you avoid these penalties. Consider sticking to a consistent schedule to pay your debts. I typically pay all of my debts within the first week of a new month. This could look different for you depending on when you receive income, but sticking to dates can make debt payments less of a headache.
4. Pay more than the minimum amount on your debt
Let’s discuss why minimum monthly payments are a debt trap. Minimum payments are usually a small percentage of your overall balance. They only prevent you from incurring late fees and also to keep your account in good standing.
Outside of these two factors, minimum payments are designed to keep you in debt. This applies to any common debt of Millennials such as car loans, student loans, and credit cards. Smaller payments may seem convenient, but they will cost you loads of money in interest in the long run. For example, let’s say you owe a minimum of $20 a month in $1,000 credit card debt at 20% APR. It will take about 16 years to pay it off and you will have paid $3,126 worth of credit card payments. But if you paid $200 on the card every month, you could pay it off in a year with the total payoff being $1,088. The difference is astounding.
The takeaway here is that you want to pay the least amount of interest over time. Minimum payments increase the total amount owed on credit cards (and other debts) and will greatly extend the time it will take to pay them off due to the accruing interest. Bankrate has a super useful tool that calculates your credit card debt pay off. They also have student loans and other debt payoff calculators. GreenPath, a financial wellness organization, also has a credit card minimum calculator tool that is really good as well, and it provides you with a payment schedule to review and follow. Use these tools and others found online to help plan your debt payoffs accordingly.