01/06/2023: 5 Steps to Reduce Debt in 2023
The New Year is a great time to evaluate your finances, especially if you know you’ve overspent during the holidays. Follow these five steps to help you emerge happy, healthy and in charge of your finances in 2023.
- Understand Your ‘Why’
Essential to making any lasting change in life is understanding your motivation and your goals. What are your reasons for wanting to reduce debt? Maybe it’s to retire earlier or more comfortably, or maybe it’s so you can afford to buy a house in the next two years. Having clear motivation for making your change is key. And on the flipside, understanding how you got in your debt situation in the first place is also important. Do you not keep track of spending? Are you an emotional shopper or all about instant gratification? These are the types of triggers you need to identify so that you can change the related behavior and succeed in your debt reduction strategy.
- Create a Plan… and We Mean Budget
Too many people fail at debt reduction because they don’t have a clear understanding of their income, fixed expenses and how their discretionary money is spent each month. A simple budget worksheet (if you’re old school) or a free mobile app like Mint, can help you create a budget and track your progress towards your goals. Don’t forget to include everyone who spends money in your household in this exercise to ensure everyone’s on the same page related to your financial goals, expectations for tracking income and expenses, and what the shared reward is when you achieve your goals.
- Slow Your (Spending) Roll
It may sound like a no-brainer, but cutting down on your discretionary spending is a good first step in either having more money to put towards outstanding debt or simply saving more. Again, understand what you’re spending, evaluate whether it’s a ‘need’ or a ‘want’, and decide where you can make cuts. We recommend looking at things like eating out, clothes, entertainment, subscription services, and transportation costs just to name a few. Decide whether some of your cuts need to be permanent or if they can be temporary once you achieve your goals.
- Think Snow … Ball or Avalanche, That Is
There are lots of strategies you can use to eliminate debt, but two of our favorites relate to snow, which we find totally relatable this time of year. The Snowball Method focuses on paying off your smallest debt first (while paying minimums on the others). Then roll the amount you had been paying on the small debt into payments on the next largest debt until you eliminate your debt altogether. The Avalanche Method has you pay off your debt with the highest interest rate first (while paying minimums on the others), then the next highest rate, and so on. It may save you time and money over the course of your debt payoff.
- Consolidate and/or Refinance Debt
An important step in eliminating debt is reducing your interest rate, monthly payments and/or time to payoff. This is where your friendly community bank can help you. By assessing your entire debt picture, we can help you find ways to consolidate and/or refinance to accomplish your goals. We look at everything from revolving credit card debt and auto and recreational vehicle loans, to education loans, home loans and other personal debt. Factors such as your credit score, interest rate, fees and minimum payment requirements will be considered to help you achieve the best possible loan product, interest rate, and monthly payment. And the ultimate goal is to reduce your monthly payments and fees to eliminate debt faster.
Just like any other long-term goal, reducing or eliminating debt is a marathon, not a sprint, and there’s sure to be ups and downs along the way. But with proper motivation, guidance, and tools, you can achieve your goal. And State Bank is here to help. If you’d like to schedule an appointment to discuss your debt and devise a debt consolidation plan, contact us today.