How to Stop Living Paycheck to Paycheck (3/5): Strategies to Break Free from High-Interest Debt
Living paycheck to paycheck can be incredibly stressful, especially when high-interest debt is weighing you down. In part three of our series, we’re diving deep into strategies to pay off high-interest debt, which includes any debt with an interest rate above 8% to 10%. This typically includes credit cards, personal loans, and payday loans. Tackling this type of debt quickly is essential because compound interest can make it grow faster than you can pay it off.
Why High-Interest Debt is Dangerous
Let’s say you have $10,000 in debt at 25% interest, a common rate for credit cards. You’d accrue $208 in interest each month. If your minimum payment is $200, you’re not even touching the principal—the original amount of the debt. This is why it’s so important to pay off high-interest debt quickly. The longer it takes, the more money you lose to interest.
Method 1: Debt Consolidation
Debt consolidation involves taking out a new loan or credit card to pay off your existing debts. The goal is to secure a lower interest rate or an interest-free period on the new loan or credit card. For example, some credit cards offer 0% interest for 12 months. If you choose this option, you need to be disciplined and pay off the entire balance within the interest-free period. If not, you could face high interest rates once the promotion ends.
Method 2: The Snowball Method
The snowball method is a popular debt repayment strategy that’s as effective psychologically as it is financially. Here’s how it works:
List All Your Debts: Start by listing all your debts, from the highest interest rate to the lowest.
Minimum Payments: Pay the minimum amount on every debt except the one with the highest interest rate.
Target the Highest Interest Debt: Throw every extra dollar you can find at this debt. The goal is to eliminate it as quickly as possible.
Snowball Your Payments: Once the highest interest debt is paid off, take the amount you were paying on it and apply it to the next highest interest debt, in addition to its minimum payment.
Repeat the Process: Continue this process, and as you pay off each debt, your payments “snowball” into larger amounts applied to the next debt.
As you progress, the psychological boost from seeing debts disappear will motivate you to keep going. Eventually, you’ll be funneling all your available funds into one final debt, paying it off much faster than if you had tried to tackle everything equally.
What’s Next?
Once you’re free from high-interest debt, you can shift your focus to saving, investing, and truly taking control of your financial future. In future articles, I’ll be talking more about these steps.
