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A Beginners Guide to Conquering Debt

Are you sick of seeing red whenever you open your bank accounts because you have racked up some debt? Good! That means that you are ready to get rid of it! In this guide to conquering debt, we are going to show you how to analyze your debt, reduce it, and take steps to paying off. 

Note: This article contains affiliate links. This means that if you purchase a product or sign up for a company through one of our links, Thrive Oak will make a small commission (at no extra cost to you).

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When Should You Start Conquering Debt?

Being in debt sucks, we know. It is unpleasant to see that big red number pulling down your net worth, so it logically makes sense to want to get rid of that debt as fast as possible. However, before you start conquering debt, you should assess these items first.

1. Minimum Payments

The first thing that you need to ask yourself is, am I easily paying all of my minimum payments? Before you can start paying off your debts, you need to be at least making the minimum payment on all of your debt. That is the #1 thing that you must do! 

2. Emergency Fund 

Do you have an emergency fund set up and stockpiled just in case something goes wrong? If not, you should highly consider making one before paying off additional debt. Learn the “why” in our article about emergency funds

3. Retirement Funds

You should always be taking full advantage of your retirement fund, whether it is a 401(k), an IRA, or something similar. The compound interest over time is (usually) worth more than paying off debt. So, once you have got that covered, then move on to conquering debt.

4. Penalties

Are you going to get penalized for paying off your debt? We know that it sounds crazy, but some loans have policies in place to prevent you from paying off your debt too quickly. Make sure that you won’t get penalized for paying off your debt because that would just be a waste of money!

Good Debt vs. Bad Debt

There is both good debt and bad debt! Excuse me! Say what? What does that mean? Let’s start on the bright side, shall we?

Good debt is an investment that will increase your net worth over time either by growing in value or by creating long-term income. This could include buying a home or paying for college. 

On the other hand, bad debt is something that gets you very little in the long run. It is money spent that loses value over time, such as buying an expensive pair of shoes or taking a vacation that you can't afford. Generally, bad debt is usually on credit cards.

Comparing the two, good debt may not need to be paid off right away. However, bad debt is something that you should conquer as quickly as you can. At the end of this article, we will talk about whether you should pay off your debt or not, but right now, we are going to go over the steps to conquering debt. 

Steps to Conquering Debt

Before we begin, remember that you have the intelligence, capability, and motivation to conquer your debt. It may be hard, but when it is finally paid off, you will feel a thousand times lighter. You can do this! Let's jump in!

Understand Your Debt

Understanding debt

The first step to take when conquering your debt is understanding it. Begin by making a list of all your debt, including who it is with, the current balance, the interest rate, and the minimum payments. We are talking credit cards, student loans, auto loans, and whatever else you may have gotten into. If you are having trouble tracking your finances, you may want to consider using a finance app to help you. 

You can even calculate your Debt to Income Ratio (DIR) to give yourself a nudge in the right direction. Since you already made that list, you can easily use this calculator to calculate your DIR. Once you understand your debt, you can start trying to lower it. 

Lowering Your Debt

This may surprise you, but there are ways to decrease your debt that don’t involve cash out front! Let’s take a quick look at a few options! 

Cut Costs on Current Loans

Did you know that you may be able to lower debt interest or get some of the debt removed entirely? Crazy, right? Depending on the type of debt that you have, you have options including:

  • Refinancing your house
  • Refinancing your student loans
  • Seeking student loan forgiveness through an employer
  • Seeking financial aid for medical debt 

By redesigning or removing your debt, it will allow you to catch up! 

Lower Interest Rates

High-interest rates can sap the life out of your finances. They take such a large chunk that it makes it can seem impossible to pay off your debt quickly, but what if you could lower your rate? There are creditors such as credit card and traditional loan companies that will lower your interest rate if you ask. You may as well try, seeing as how the worst that they can do is say no. But if they say yes, you could save thousands of dollars and pay off your debt that much faster! Granted, you will likely need a good credit score and a solid payment history to get them to say yes. 

Balance Transfers

If you have credit card debt and you can't get your lender to lower your interest rate, you may want to consider a balance transfer. A balance transfer is merely transferring the debt from one credit card to another credit card, preferably one with a better interest rate. For example, say that you had a credit card with $3,000 worth of debt and a 12% interest rate. That means you would pay $360 worth of interest that year. However, if you transferred it to a new credit card with a 0% interest rate, you would have no interest and could use that money to pay off the debt faster. 

Before you sign on thinking that this is the easy way out, we do want to caution that while this seems like an easy solution, it is crucial to proceed with caution. First, you want to see if there is a fee to transfer your balance. If so, it may not be worth the cost. Second, this solution doesn't pay off your debt for you; it just gives you extra time. If you don't pay off the debt at the end of the 0% interest period, you may have to pay a higher interest rate than the previous card. Third, doing this takes a pretty good credit score history; if you don’t have that, you will get denied. The important thing to remember is to crunch the numbers before you do it! 

Debt Consolidation Loans

If you are having trouble with all the options above, don't give up! You may want to consider a debt consolidation loan. What is this, you ask? A debt consolidation loan is essentially a personal loan that you take out to pay off your debts. It seems kind of like a roundabout way to do things, but here is why it is becoming popular.

Stack of credit cards

Usually, when people create debt consolidation loans, it is because they have high-interest rates on those loans (generally credit cards). By taking out a personal loan, they can pay off those loans and get a lower interest rate. Yes, they still have to pay back the money, but it is with less interest.

Again, keep in mind that to get these loans, you need a pretty good credit score and be considered a wise investment by the lender. So, you can’t just go back to your old spending ways, but you must work to pay off the debt. 

Conquering Your Debt

Now that you have lowered your debt as much as you can, you need to focus on paying it off. We are not suggesting that you turn into a hermit who has no life but to apply these techniques instead.

Use Extra Money to Pay Down Debt

Some of the most delightful moments in life are when you get some extra cash. This could come from a gift, a work bonus, a tax return, an economic stimulous check, or maybe you even won the lottery! If you are serious about conquering your debt, don’t use this money to go on a shopping spree! Instead, use this extra cash to make additional payments on your debt. 

Let's say that you don't get an unexpected windfall, how are you going to get extra cash? If you are looking for a one-time quick money maker, you could sell some of your old stuff in a garage sale, on Craigslist, or in online consignment shops like The Real Real

However, if you are looking for a consistent way to have extra money in your life, you have one of two options. First, you can reduce your monthly expenses. This will provide you with extra cash at the end of the month that you can use to make additional payments. The second option would be to make more money! You could do this by working more hours, asking for a raise, taking on a second job, starting a side hustle, and more. The critical thing to remember is that as you make more money, you DON'T spend more money. Keep your spending levels the same as before you start, and you will have extra cash to conquer your debt! 

Pay Off the Worst Debt First

The best way to conquer debt is to focus on one debt at a time. Yes, you still need to pay your minimum balance on all debts, but you should focus on using extra money to pay off one debt at a time. This is because evenly spreading out additional payments will only slowly get you where you want to go. By focusing on one debt at a time, you can demolish it quicker, feel the success, stay motivated, and move on to conquer the next one.  

So which debt is the worst? This is a concept that is up for debate, and it really depends on who you ask. Since we can’t read your minds, and you know yourself best, you decide. We will recruit three imaginary friends to help us: Ana, Brad, and Charlie. 

Ana, Brad, and Charlie have identical problems. They each have three debts: 

Debt #1 is a $5,000 of debt with a 10% interest rate and is an auto loan.

Debt #2 is a $4,000 of debt with a 15% interest rate and is all that is left of a student loan. 

Debt #3 is a $3,000 of debt with a 20% interest rate and is an accumulation of credit card charges.

Even though Ana, Brad, and Charlie have identical problems, they are not the same people. They each have a different mindset, different goals, and each went about paying off their debt in a different way.

Group of friends around a computer

Ana hates having a significant loan debt. She doesn't like the big red number staring at her every month because it decreases her confidence and motivation. That is why Ana decided to pay off the most expensive loan first, Debt #1.

Brad, on the other hand, has been paying off his student loans for ten years. He is so sick of it and just wants to be free. This is why Brad decided to pay off the most annoying loan to him, Debt #2.

Charlie, however, is a numbers guy. He thinks that paying excessive interest is stupid, which is why he chose to pay off the debt with the highest interest first, Debt #3

Each method and reasoning is different, but they all worked for them. Whether it was getting down the biggest loan to build confidence (Ana), paying off the most annoying loan (Brad), or paying off the loan with the highest interest rate (Charlie), they each moved forward and made progress based on their mindset and goals. Which one will work for you?

Avoid More Debt

The last thing that you want to do when conquering debt is accumulating more debt! That would be counter-productive, huh? Avoiding more debt likely means that you will need to re-evaluate your lifestyle and change your spending habits. You will need to think of your goals and use them to block the urge to spend unnecessary money! Take an hour to sit down to write out your goals, a budget, and a plan of action. Tack it on to the fridge so that you can see it every day. Better yet, add a sticker to your credit cards as a reminder every time you want to buy something that isn’t worth it! You can do this! You just need to make it fun. 😊 

Goal Setter

Make it Fun 

Paying off debt can be a total drag, we get that! So why not make it a little more fun? Do a DIY project that will inspire you every time that you look at it to pay off your debt! Or create a reward system for yourself. For example, every time that you make an extra payment, you could treat yourself to a cheap or free activity like getting ice cream or taking an afternoon to go hiking. By making it fun, you will continue to feel motivated and excited to pay off your debt! 

Should I Be Conquering Debt or Investing?

Remember when we talked about good debt versus bad debt? Like with many aspects of the financial world, there is a balance.

To make it incredibly simple, you would compare your debt’s after-tax interest rate and the rate of return on the investment. Hold up; you said simple! That ain’t simple! Don't worry; we got you! Essentially, that sentence translates to this, “would the investment make a higher rate than what you would be paying off.”  

Let’s look at our imaginary example, Jill Oaks. Jill Oaks went to university and racked up $50,000 of student debt. Ouch! On this debt, Jill has a 5% interest rate. Each month she makes her minimum payment and has been doing that steadily for a few years. Luckily for Jill, she got a surprise windfall! Her job gave a holiday bonus of $2000, and she is trying to decide what to do with it. She already has an emergency fund set up, has maxed out her retirement fund, and has no other debt. Should she use that $2000 to make an extra payment, or should she invest it?  

Jill went and talked to an investment advisor and found that if she put that $2000 in a steady index fund, she would make a 7% return. Should she do it? Let's look at the numbers! By investing in the index fund, she will gain a 2% rate of return on her money (7% index fund – 5% debt rate = 2% rate on return). In this case, investing may be a better option!

However, let’s say that instead of a 7% return on the Index fund, she was only getting a 4% return. Should she do it? In this case, Jill would be making a -1% rate on return (4% index fund- 5% debt rate = -1%). In this case, she is losing money! So, the answer would be no. It would be better for her to use her bonus money toward her loan balance.  Essentially, you would want to choose the option with the best rate of return on your money.

BUT life is never quite this simple! Jill also needs to take into mind tax deductions. She has tax-deductible student loans. This means it may be beneficial for her to simply make the minimum payments and find another way to invest. It is also vital to consider the mindset. If having student loan debt causes Jill a lot of anxiety, it may be best for her to pay them off quickly so she can be worry-free.

Start Conquering Debt Today!

You Can Do This! If you made it all the way to the end, congratulations! By doing this, you just completed your first step to conquering your debt. Begin by analyzing your debt, determine whether it is “bad” or “good” debt, and if you should focus on paying it off or investing. If you decide to pay it off, make a list of actionable steps (the ones that we talked about above) that you can do to achieve your goal; make it fun, and add a reward at the end to motivate you to do it! This is your future and your money; you have the power to work it to your advantage. You can do this!

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