3 ways to pay off your debt
If you’ve got debt, you’re not alone. The average American has about $80,000 in debt, excluding home mortgages. But unexpected or unplanned debt such as medical bills or credit card balances can be a tipping point into financial insecurity.1
If you have too many payments every month, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account.
Try to make progress every month on reducing your debt. It takes a little organization up front, plus a strategy that fits your budget and your preferences. These steps can help:
Make a list of all your debt.
Before you start paying off debt, tally how much debt you have. Make a list with this information for each bill you owe.
The details you need to know about every debt:
- Debt name/account
- Type of debt (credit card, student loan, etc.)
- Balance
- Interest rate (some debt is more expensive, i.e., has a higher interest rate, than others)
- Payment terms/length
- Minimum monthly payment
Figure out the maximum you can pay every month.
Review your budget and answer these questions:
- How much do you need to pay for necessities such as rent/mortgage, insurance, utilities, and food?
- How much do you currently pay each month toward debt?
- Can you temporarily trim a few budget items to put even extra toward debt?
- Any extra income—tax refund, side hustle, things like that—to put more toward debt?
The 50/30/20 approach3 simplifies budgeting:
Pick a debt repayment strategy.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently.
| What it’s called | How it works | How you keep it going | Why some people like it |
|---|---|---|---|
| The snowball method | How it works How it works Pay the smallest debt as fast as possible. Pay minimums on all other debt. | How you keep it going How you keep it going Then pay that extra toward the next largest debt. | Why some people like it Why some people like it A quick payoff is a quick win and can be a confidence booster. |
| Debt avalanche | How it works How it works Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. | How you keep it going How you keep it going Then pay that extra toward the next smallest debt. | Why some people like it Why some people like it Paying off a big debt can boost a feeling of control and gets rid of big interest, too. |
| Debt consolidation | How it works How it works Combine debts into a single account. | How you keep it going How you keep it going Avoid any other debt until post-payoff. | Why some people like it Why some people like it Possible lower interest and one account increases focus. |
Celebrate success and stay on top of future debt.
Sometimes debt can be good to help you build a credit score or accomplish goals—such as buying a house—that would be hard to do without a loan. But lots of extra debt can weigh down your credit score and add up to interest you didn’t want to pay. So celebrate every extra payment—and every debt pay off, too.
What to do next?
- After you’ve paid off debt, focus on building retirement savings. Learn what can go into a successful post-work plan.
- Talk to a financial professional about your retirement saving strategy. If needed, we’ll help you find one.
1 https://www.investopedia.com/financial-edge/0310/top-5-reasons-people-go-bankrupt.aspx
2 Experian Consumer Credit Review 2020
3 All your worth: The ultimate Lifetime money plan by Elizabeth Warren and Amelia Warren-Tyagi
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professional or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products issued by Principal National Life Insurance Co (except in NY) and Principal Life Insurance Co. Plan administrative services offered by Principal Life. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-247-1737, member SIPC and/or independent broker-dealers. Principal National, Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.