Lowering Debt

Financial milestones are markers of progress used to measure financial success. One common financial milestone involves lowering debt to improve financial health. Having less debt can equate to more financial security-the ability to save more money and take advantage of new opportunities, decreased mental and physical health issues through reduction of stress, and the potential to free up income for life expenses during retirement.

Managing Debt

How much debt do you have-credit cards, car payments, mortgages, and student loans? Understanding your financial position is the first step to managing debt. Being aware of how much money you have and monitoring the amount going out can help you identify how debt was accrued in the first place, and to prioritize lowering your debt obligations going forward. Analyze interest rates on your existing debt so you can determine which debts are creating the most financial strain. Periodic checks of your credit report should be completed to ensure you haven’t forgotten about any debt. This will also give you the opportunity to inquire about accounts that you don’t recognize. Finally, make an effort to stop taking on new debt and start focusing on paying off your existing debt.

Consolidating Debt

Debt consolidation involves rolling high-interest debt into a single monthly payment at a lower interest rate. There are benefits to debt consolidation. These include lower interest rates, a shorter timeframe for paying off your debt, and more manageable payment amounts. Examples of debt consolidation strategies include credit card balance transfers, debt consolidation loans, and home equity loans. These options are not without risk though. There is no grace period for new purchases on credit card balance transfers, and interest rates can increase if payments are late. Debt consolidation loans might offer a lower payment, but also a longer time to pay off debt, which could equate to paying more overall. Home equity loans may offer lower interest rates than other types of loans, but foreclosure is a risk if you fail to pay back the loan. Additionally, if home values fall, you could be at risk of holding an underwater mortgage-where you owe more money on your loan than the home is currently worth.

Debt Pay-Off Methods

DIY debt reduction strategies can be less risky in helping you to reach your financial goals. The debt snowball method entails paying off debts in order from smallest to largest, regardless of interest rates.. Once the smallest debt is paid off, payments are then applied to the next smallest debt, with minimum payments continuing on all other debts. This strategy can help you see progress faster and help you stay motivated to continue the process. Debt avalanche, conversely, involves focusing on debt with the highest interest rate first. With this strategy, the goal is to wipe out the debt with the highest interest rate while maintaining minimum payments on all other debts. Depending on the balance of the highest interest debt, it might take longer to see progress using this strategy. Another strategy, focusing on credit utilization, involves paying down credit cards with the highest percent of credit limit being used. Because credit utilization plays a role in calculating credit score, this method may offer the added benefit of improving your credit score while reducing debt.

Living Debt-Free

Once you have implemented a debt reduction strategy and worked to lower your debt, it is likely your spending behavior will change, too. Working toward living debt-free can bring financial peace. People who live debt-free exercise self-control, and they are able to say "no" to wasting money.