Rising prices and slow wage growth have caused major financial struggles for many families. One of the biggest challenges is the rising debt. In 2023, the average household credit card balance reached $6,501, which is a 10% increase from the previous year. Personal loan amounts also grew by 6.3%, reaching $19,402.
Households with lower incomes often have the highest credit card debt compared to their income, making it harder to pay off. However, even families with limited income can take steps to reduce and eliminate their debt.
Create a Budget
Write down all your income and expenses. Be honest with yourself—include everything from rent and groceries to that daily coffee run. Once you see your spending habits clearly, you can identify areas where you can cut back.
Prioritize Your Debts
Not all debts are created equal. List out all your debts, including the balance, interest rate, and minimum payment for each debt. Prioritize clearing credit card balances and other high-interest debts first. While you’re paying extra on your priority debt, keep making minimum payments on the others to avoid late fees.
Negotiate with Creditors
Many people don’t realize they can negotiate with their creditors. Try to convince your creditor to lower the interest rate. If you’re struggling to make payments, some creditors might be willing to work out a payment plan or even settle for less than you owe.
Cut Unnecessary Expenses
Look at your budget and be ruthless about cutting non-essential expenses. Ask yourself if you really need all those paid subscriptions to streaming platforms. Perhaps you should cook more often at home rather than going out to eat. Small cuts can add up to significant savings over time.
Consider Debt Snowball Method
The debt snowball approach means making the minimum payments on all of your bills while allocating any additional funds to the loan with the lowest balance. After paying off that debt, proceed to the next smallest amount. Here’s how it works:
- Focus extra money on the smallest debt while paying the minimum on others.
- Once the smallest debt is cleared, use that extra money to tackle the next smallest.
- Continue doing this until all debts have been settled.
Since higher-interest debts are paid off later, this strategy may result in higher long-term costs even though it feels good to pay off debts quickly.
Debt Avalanche Method
The debt avalanche method targets debts with the highest interest rates first, which saves more money in the long run. The steps are simple:
- Pay the minimum on all debts, but direct any extra money to the debt with the highest interest rate.
- Once that debt is paid, focus on the next highest interest rate.
- Keep going until all debts are cleared.
If you have a lot of high-interest debt, this method can help you pay off your debt more quickly, but it may also take more time.
Debt Snowflake: Small Efforts Add Up
The debt snowflake method focuses on making small, everyday savings to pay off debt. Here’s how you can do it:
- Use coupons and buy generic brands.
- Save travel expenses by using carpool or public transport
- Sell unused items online or through yard sales.
- Use cash back from credit cards toward your debt.
Clearing debt takes time and persistence. Remind yourself why you’re doing this. Maybe you want financial freedom, less stress, or to save for a big goal.
Know that clearing debt is a process that requires patience and commitment. Do not give up even if you encounter obstacles along the way. Every step you take towards reducing your debt is a step towards financial freedom.
