You may have accumulated debt as a military veteran to pay immediate bills, to help your family, to deal with emergencies, to go to school, to buy a car, pay for your home, start a business or other expenses you have. Many young Americans are eager to get their first credit cards, but rack up their debt so fast that it can take a minimum of 15 to 20 years to pay off!
Paying off debt takes effort. It does not happen overnight. It however will put you back in the driver’s seat and fully cognizant of your financial picture at all times. As you pay off your debt, you will become more comfortable saying no to unnecessary expenditures, to budgeting properly and most importantly, living within your means.
Here are 8 strategies that can help you pay off your debt.
1. Pay more than the minimum
Avoid paying just the minimum required each month. This amount, just 2% to 3% of the outstanding balance keeps you in debt for as long as possible. Pay off as much as you can each minimum. Say your minimum payment is $100, then pay $200 or more. Eliminate other expenses by making a few sacrifices or reducing unnecessary expenses and you will find extra dollars to pay off your debt faster.
2. Snowball your debt payments
Examine your credit cards. If you have several, and one of them has a significantly lower interest rate, see if you can transfer the balance on your high interest rate card to the lower one. Pay the minimum balances on all cards without fail every month until your cards are paid off in full. Then funnel the majority of your debt repayments into that one credit card with the large balance and higher interest rate, and pay it off as quickly as possible. When the balance on that card reaches zero, move on to the next with the same aggressive repayment plan. Keep doing this. This is called snowballing and eventually you will have paid off all your debt.
3. Cash out your savings account
Use your savings account to pay off your debt. This is NOT an ideal situation but when your debt interest is over 10%, that is advisable. Pay off the debt as quickly as you can and then replace your savings.
4. Borrow against your life insurance
If you have life insurance with a cash value, borrow against the policy. Usually the rate is quite low and you can use that cash to pay off your other bills. Then pay off this loan as fast as you can.
5. Ask family and friends
Get help from friends and family to pay off your bills immediately and then pay them back slowly over time after you are back on your feet.
6. Get a home equity loan
Do you own your own home and have equity that's accumulated through the years as you've paid off the mortgage? You can get a home equity loan (HEL) line of credit for the maximum amount possible. This helps you pay off all your debt immediately and you can itemize deductions on your income tax returns as HEL interest is a deductible item under most circumstances. For example, if you are in the 25% marginal tax bracket, the 6% loan has an effective rate of 4.5%, and that's probably the lowest interest rate you'll see on personal loans. It is important that after you have paid off the cards, that you do not use them and instead keep paying the HEL loan till it is all cleared out.
7. Borrow from your 401(k)
Do you participate in a 401(k) qualified retirement plan at work? Most 401(k) plans have a feature that lets you borrow up to 50% of the account's value or up to $50,000. The interest on this is low but again this is NOT an ideal situation and only something to do in a dire emergency or if you have too much debt.
8. Renegotiate terms with your creditors
See if you can renegotiate terms with creditors for lower interest rate or a reduction in payment. You can even get help doing this from organizations that offer this service.
Finally most of all, once you have cleared out your debt, take stock of your financial spending habits and use your newly acquired discipline to not repeat the same financial decisions. Get busy building your savings account for emergencies and future retirement. Replace any savings taken out from retirement accounts and keep your expenses always below your income. Good luck! Get in touch with us at VFF if you any questions.