Before diving into specific debt repayment methods, it’s essential to establish a solid financial foundation. The first step is creating a budget.

A budget helps you understand your income, expenses, and the amount you can allocate toward debt repayment.

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Let’s look at a real-life example:

Meet Sarah: She’s a recent college graduate with $30,000 in student loans. To create a budget, Sarah begins by listing her monthly income, which is $3,000 from her job. After listing her essential expenses, such as rent, utilities, and groceries, she realizes she has $1,500 left each month. Sarah decides to allocate $800 of that surplus to her student loan repayment.

It may be hard at first to allocate all of your extra funds to debt but trust me it is worth it.

The Debt Avalanche Method

The debt avalanche method is a popular approach to paying down debt quickly. With this strategy, you focus on paying off the debt with the highest interest rate first. Once that debt is paid off, you move on to the next highest interest-rate debt.

Let’s see how Sarah applies this method:

Sarah has three student loans with interest rates of 6%, 4.5%, and 3%. She prioritizes the loan with the 6% interest rate.

After making her minimum payments on the other loans, she directs her extra $800 toward the highest interest-rate loan until it’s paid off.

This method can save her a significant amount of money in interest payments over time.

The Debt Snowball Method

Another popular strategy is the debt snowball method. In this approach, you focus on paying off the smallest debt first, regardless of the interest rate. Once that debt is eliminated, you move on to the next smallest debt.

Here’s how it works for Sarah:

Sarah has three student loans with balances of $10,000, $15,000, and $5,000. Instead of prioritizing the highest interest rate, she starts with the $5,000 loan.

She allocates her extra $800 toward this loan and quickly pays it off. The sense of accomplishment from eliminating the smallest debt motivates her to tackle the larger ones.

This method can provide a psychological boost, even if it may not save as much on interest as the debt avalanche method.

Debt Consolidation

Debt consolidation is a strategy that involves combining multiple debts into a single loan with a lower interest rate. This can simplify your monthly payments and potentially reduce the total interest paid.

Sarah considers this approach for her student loans:

Sarah qualifies for a debt consolidation loan with a 4% interest rate, which is lower than her current student loan rates. By consolidating her $30,000 in student loans, she saves money on interest and simplifies her monthly payments.

This can be an effective strategy if you can secure a lower interest rate.

Increase Income to Accelerate Debt Repayment

While budgeting and smart debt repayment strategies are essential, increasing your income can significantly expedite the process.

Many people take on part-time jobs, freelance work, or side gigs to generate extra income.

Sarah decides to work part-time as a freelance writer, earning an additional $500 per month.

This extra income is directed toward her student loans, helping her pay down debt more rapidly.