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November 25, 2019 Debt Management Joshua Williams

The Dos and Don’ts of Debt Repayment

Staying on track with your financial goals during the holiday season is not easy. There are gifts to buy, enticing sales to snag, and delicious foods to eat. Reduce your stress this year by following these dos and don’ts of debt repayment.

If done without a repayment strategy, borrowing money can get expensive and could potentially high-jack your financial goals. Debt repayment should be a top priority when aiming for financial wellness (even during the holidays!). Whether you’re chipping away at a loan or recovering from credit card debt, these tips can help correct unhealthy attitudes surrounding debt.

DON’T Pretend Your Debt Doesn’t Exist

You can’t solve a problem that you refuse to acknowledge. Ignoring your debt can lead to some financially devastating consequences. Here are some common habits people tend to fall back on:

  • Ignoring Your Bills: Allowing the stack of unopened mail on your kitchen counter to grow can lead to missed payments or late fees. This only increases your amount owed. Open your mail immediately and keep your payments up to date.
  • Avoiding Budget Adjustments: Refusing to make any changes in your monthly budget is another form of willful blindness. To make significant progress, you need to increase the amount you put toward your loans every month. This means you have to increase your income or decrease your spending. If you don’t currently have a budget, no worries, now is a great time to make one!
  • Packing on More Debt: Possibly the most destructive form of debt denial is spending even more to maintain the illusion of not being in debt in the first place. Trust us, taking a temporary hit to your pride far outweighs attempting to finance a lifestyle you can’t afford. It’s not sustainable and will hurt your financial wellness in the long run.

DO Tell Someone About It

We’re not saying it has to be your go-to icebreaker at all your holiday parties, but do consider talking about your debt with those you trust. Consider sharing this with your partner, your family, or a close friend.

  • Take a Load Off: Shame loves secrecy and though it may feel uncomfortable, pushing through the fear of telling others will lessen feelings of guilt and anxiety that often accompany debt shame. You will likely feel a lot “lighter” after sharing the truth about your debt.
  • Create Accountability: Being open about your financial priorities can also create accountability and develop a support system. By telling others about your debt repayment goals, you no longer have to make awkward excuses to avoid activities beyond your budget.
  • Be a Trailblazer: We’re willing to bet that you aren’t the only one facing debt anxiety in your group of family and friends. You may find that your honesty and efforts inspire others to be more transparent and/or proactive about their own debt.

DON’T Prioritize General Savings and Investing Over High-Interest Debt Repayment

A common question about debt repayment is: where does it fall in the order of financial priorities? Is it more important than investing? Should you pay it off before you start saving for retirement? The specific answer will look different for someone paying an auto loan versus someone facing $10,000 of credit card debt, BUT:

  • General Rule of Thumb: High-interest debt repayment should be your priority. The reasoning is that high-interest debt (like credit card debt) is expensive. Consider this: the interest rate on your credit card could be five+ times the rate on your mortgage! The sooner it’s eliminated, the sooner you’ll have extra funds to put toward savings, investments and retirement. Low-interest debt (like some mortgages) may be able to coexist with savings and investing contributions.

DO Make Room for Emergency Fund Savings

Although high-interest debt repayment should come before general savings, you need to have an emergency fund in place.

  • Get Your Base: Three to six months’ worth of expenses is the ideal amount to have in the bank, but even a mini-fund of $1,000 will do the trick.
  • Keep Your Repayment on Track: It may seem counter-intuitive to save up $1,000 that could otherwise be going toward your loans, but hear us out. When you’re already in debt, all it takes is one emergency (car or house repair, medical expense, etc.) to force you into taking on more debt, wiping out your current progress. This emergency fund will decrease the likelihood of having to resort to more debt.

DON’T Underestimate the Consequences of Staying in Debt

The financial consequences of debt paint only part of the picture—being in debt can take a toll on our health and our well-being.

  • Save Your Health: A 2012 University of Nottingham study found that those who struggle to pay off their debt are more than twice as likely to experience mental health problems like depression and severe anxiety. Debt can also be emotionally overwhelming as a looming source of fear, resentment, frustration, regret and shame.
  • Save Your Relationships: Debt stress can carry over into our relationships. Arguments about money are considered one of the top predictors for divorce.

Debt repayment is more than a simple financial goal—it’s a health and wellness goal as well.

DO Make a Debt Repayment Plan

Luckily, the steps are pretty easy to follow:

  • Make a list of all your debts—credit card, medical, student loans, etc. You’ll need to know the balance you owe, the interest rate and the minimum payment for each debt.
  • Total up your minimum payments, then define an additional amount of money to put toward loan repayment (choose an amount you can realistically afford, but don’t be skimpy).
  • Choose a repayment strategy to structure your plan. Popular strategies include:
    • The Snowball Method: sorting your debts from lowest balance to highest balance
    • The Avalanche Method: sorting your debts from highest interest rate to lowest interest rate
    • Consolidation: taking out a new loan to pay off all your other debts, then repaying that one loan

      Each strategy has its own pros and cons, so a little research will come in handy in determining which strategy best suits your circumstances.

  • Create a prioritized list of your debts, using your repayment strategy as a guide.
  • Each month, pay the minimum balance on all your loans except for the one at the top of your list—that one gets the minimum payment plus the additional funds you determined in Step 2.

That’s it! As you sequentially pay off your debts, you’ll have more money to apply to the next debt on the list. Debt repayment requires action, some discipline and a lot of patience. Having a plan helps track progress and keeps you from getting discouraged. If you need additional assistance in building your repayment plan, Workers has partnered with BALANCE for more debt-related resources.