What to Do When You're Drowning in Monster Debt
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Carrying debt has become the American way: Nearly three quarters of us struggle with it, owing an average of $37,000, and more than 10 percent have debt exceeding $100,000. Of those in debt, 45 percent spend up to half their monthly incomes on debt payments and 14 percent expect to be in debt forever, according to a recent Northwestern Mutual study. Ouch.

There’s no question that staring down monster debt is daunting. But resigning ourselves to it is the polar opposite of building wealth. Here’s how to start knocking out that debt.

1. Create an action plan.

This may seem obvious, but a lot of us just throw extra money toward debt payments when we can and leave it at that. If you’re mostly making minimum payments without an actual plan to wipe out debt altogether, though, it’s easy to just keep doing that—and paying for it in interest. “You can keep kicking the can down the road, but eventually it will catch up with you,” says financial advisor Andrew Rafal of Bayntree Wealth Advisors.

Let’s say you have $10,000 in credit card debt. Based on the current average variable interest rate (16.45 percent), if you were to make a minimum payment of $200 a month, it would take you 85 months—or more than seven years—to pay it off. And you’d end up paying almost $7,000 more in interest!  

The payoff plan is the antidote to all that, but it does require discipline and focus. First, organize your debts by interest rate. Generally speaking, it makes the most sense to tackle the balance with the highest interest rate. (The exception is if you have a small balance with a lower rate: knocking out that one debt first can help keep you motivated and let you direct what you’d been paying on it toward remaining debts.) Set your debt-free target date and commit to a plan for how you’ll increase and prioritize payments to meet it.

2. Seek a lower interest rate.

Got high-interest credit card debt? The credit card industry is competitive. If you have decent credit, you can likely get a zero-interest balance transfer offer from another bank if you open a new card—or, if you have a card you’re not using, call to see if they have a balance transfer offer. Just be sure that you can pay off whatever money you transfer before the offer expires. And check the fine print for balance transfer fees: Some can be as high as 4 percent. (MagnifyMoney recently ranked the best 0-percent APR credit card offers with no balance transfer fees.)

You can also try calling your credit card issuer directly and asking if they can lower the interest rate. Let them know you’ve made timely payments (if you have) and that you’ve gotten a balance transfer offer but would like to keep your money with that credit card company if they can bring the rate down. (Creditcards.com offers a sample script for requesting a lower rate.)

3. Look for painless ways to cut expenses.

Chuck Mattiucci, a financial advisor at Fort Pitt Capital Group in Pittsburgh, recommends tracking your spending for a month then creating a budget to understand where your money’s going and where you can trim. Refer back to it weekly. “The more attention you give to it, the more effective it will be,” he says.

On top of the obvious places to scale back—like dinners out and shopping trips—look at how to cut recurring expenses. Get a roommate or rent out a room, negotiate monthly bills and carpool or bike when you can, for example.

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4. Boost your income.

In addition to asking for a raise (when you can make a good case for it), picking up a side gig can also help you pay off debt faster. Rafal also recommends selling unwanted items on eBay, Craigslist or at a garage or stoop sale.

Just make sure you’re funneling most of that extra cash toward debt.

5. Look for forgiveness.

If you have student loans, you may be eligible for a federal forgiveness program. For example, the Public Service Loan Forgiveness program is available to those who work for a qualifying government organization or nonprofit for 10 years. The Teacher Loan Forgiveness offers forgiveness of up to $17,500 for teachers who work in low-income schools for five consecutive years. (The Department of Education offers more details on ways you can get your loans forgiven, canceled or discharged if you qualify.)

“Just consider tradeoffs with respect to earnings potential or workplace opportunities when considering your options,” says Rebekah Barsch, Northwestern Mutual’s VP of planning.

6. Don’t stop saving and investing.

Even though paying off debt is a top priority,  don’t stop saving and investing, Rafal says. “You do not want to get out of that habit.” Setting up automatic transfers to savings means you’ll be prepared for emergencies. Even if you save just 3 percent of your paycheck, that can help you avoid getting in deeper debt if an unexpected expense comes up.

Why is it so important to invest while paying off debt? Because: compounding. “Whatever you can invest as early as possible can have a big impact down the road,” Mattiucci says. “The compounding effect over time is dramatic.”

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