Don't let debt weigh you down. Image source: Beth Scupham via Flickr.
When Mae West said, "Too much of a good thing is wonderful," she wasn't talking about debt. While some debt can be good, too much of it can be crippling. Even a small amount of the wrong kind of debt -- the high-interest variety -- can wreak havoc, and every dollar of debt and interest we have to pay off is money we can't use in more productive ways.
Looking for smart ways to rid yourself of debt? Three of our top contributors weigh in with some great ideas below. There's a good chance one of their suggestions could help you start ridding yourself of debt today.
Eat an elephant a bite at a time
Todd Campbell: Got debt? No problem. Ridding yourself of debt may seem impossible, but it isn't. You just need a good plan to do it!
For example, let's say Jim is 40 and he has a brand new 30-year mortgage at 3.9% interest and a monthly payment of $943 per month. If he doesn't pay that mortgage down ahead of schedule, he won't be free and clear of his mortgage debt until he's 70.
Jim would prefer to retire mortgage-free in his mid 60s, not at 70, so Jim runs the numbers and determines that he can afford to make one additional $943 mortgage payment every year without it having a major impact on his day-to-day living.
Assuming that Jim sticks to his plan and makes that one extra payment every December, Jim will shave four years off his mortgage, allowing him to retire mortgage-free at 66.
Even better, because Jim's plan reduces principal owed, it also reduces the amount of interest he's going to have to pay by more than $20,000! That may not be enough to allow Jim to retire to the islands, but it's far from chump change.
Consolidate high-interest debt and get a lower rate
Jason Hall: The most harmful kind of debt is the high-interest variety, especially credit card debt. One smart way to do this is to take advantage of ways to reduce the interest rate you're paying now. Two common methods:
- Credit card balance transfer promotions
- Debt consolidation loans
With relatively good credit, you may qualify for a promotional credit card balance transfer, with a low -- or even zero -- interest rate for a period of time. While you may pay a one-time fee of around 3%, the significantly lower interest rate means money you won't pay in interest that you can put toward paying off the balance.
Another popular option is a consolidation loan, which would pay off the high-interest debt, and give you a single loan with a lower interest rate to pay down. Again, the idea here is that every dollar you don't pay in interest can go toward paying off the balance more quickly.
Pay off expensive debt first
Dan Caplinger: As Jason points out, when you have high-interest debt, it makes sense to get it paid down as soon as possible. Even if you can't get a consolidation loan, there's still a method you can do to get yourself out of debt more quickly, and it uses simple common sense.
The key to getting out of debt is minimizing the amount of interest you have to pay. When you're making minimum payments, almost all of your money goes toward interest, and you only pay down principal very slowly. It's therefore crucial that when you have some extra cash, you use it to pay down the debt with the highest interest rate first. Once you get your highest-rate debt paid off, then you can turn to the debt with the next-highest interest rate.
This is sometimes called the snowball method for paying down debt, because as you eliminate your highest-interest debt, you'll have more available cash to reduce your outstanding balances on your remaining debt. The snowball method also puts you in a great position to start investing after you eliminate your debt, because you're already used to setting aside fairly substantial amounts of money to make payments that you can then divert toward opening a brokerage or mutual fund account. Paying down debt is slow at first, but eventually, you'll pick up speed and get into a much better place financially.
