Ah, the new year. A time for reflection and resolution-making. Each year countless Americans resolve to pay off their debt, but few actually do.
January’s enthusiasm may fizzle by February if your plan is too complex to live with or so flimsy it’s easily forgotten. Try this three-step plan instead — you get steps 1 and 2 out of the way upfront, then choose a payoff method in step 3 that will see you through the rest of the year.
It’s scary — but you need an honest evaluation of your debt load, and you have to do this only once.
Gather all credit card, student loan and medical statements, plus any other invoices. Make a list or spreadsheet showing all debts and the interest rates you’re paying.
Calculate your necessary monthly expenses (including what you may need to build up an emergency fund, which is key to avoiding more debt). Subtract that from your monthly income to get the baseline for what you’ll dedicate to debt eradication.
Now, get creative. To make real progress, you’ll likely need to make a little more money and find ways to spend less, like selling old electronics or cutting out cable. Finding even $50 or $100 extra each month for debt paydown can save you hundreds in interest.
Again, doing this prep work may not be fun, but setting aside these funds can essentially automate the process.
There are countless ways to get into debt, but only two main methods to pay it off: the debt avalanche and the debt snowball. Which is best for you depends on your preference: instant gratification or patient persistence.
The debt avalanche is the fastest way to pay off debt, though it might feel slow at first. You pay off debts with the highest interest rates, which can save you hundreds of dollars over time. The catch: It may take a while to get that first debt erased.
If you need some upfront rewards to keep you going, the debt snowball might suit you better. Organize your debts from smallest to largest — disregarding interest rate — and pay off smaller debts first. The victories come faster than with the avalanche, though overall it will take longer and cost you more in interest.
You can supplement either strategy with the occasional flurry of debt snowflakes, where you put small everyday savings toward your goal. Skipped your morning latte? Put that $5 toward your debt.
“Paying off the highest-rate debt obviously makes the most financial sense, but sometimes you need a quick win to keep yourself motivated,” says Liz Weston, NerdWallet columnist and certified financial planner. “If that’s the case, consider starting with one or two small debts to get that sense of victory and then move on to your higher-rate debts once you’ve proved to yourself that you can make progress.”
This article was written by NerdWallet and was originally published by USA Today.