How To Pay Off Debt In One Year?
Living with debt is not a new thing as most people would have dealt with debt at some point in their lives. Welcome to the adult world!
As per the Experian data, the consumer debit in aggregate reached a new height of $14.1 trillion in 2019. This overall increment had shown the growth in every debt category.
This includes high mortgage loans, student loans, credit card debts, auto loans, personal loans, lines of credit, and HELOC (Home Equity Line of Credit).
If you feel that you’re drowning in debt and worried about owing so much money, relax, take a deep breath, and stop digging!
Worrying about your debts will not solve it, so stop worrying and start finding solutions instead because worrying will only affect your mental health.
Let’s face it, life happens, and just like anyone else, there are times that we make these stupid money mistakes that dig us down into the debt trap, and the sad part is, most of us may have kept digging, ’till we could barely afford to pay the minimum payments.
If you want to change, you have to change!
Trying to pay off your debt in one year, is rather subjective as it depends on how much or how small your debt is and your capacity to pay it off.
Luckily, there are effective debt repayment strategies that can help you pay off your debts fast. It does require some sacrifice!
And depending on the amount you owe and your available cash flow, you may not be able to pay off your debt in one year, but you’ll definitely make some progress into becoming debt-free if that’s your goal, as it should be.
Keep in mind that debts are like shackles that hold you down from achieving financial freedom.
IOU equates to “I own you”.
Eliminating your debt first is the best way to take charge of your financial life and get back your peace of mind.
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Why Should You Pay Off Your Debt Fast?
Understand that debt is slavery, and that the more you owe, the more part of your life energy you’ll have to spend working for your creditors.
This means that as long as you’re in debt, you won’t have control over your financial life.
Most people think that paying off the minimum required amount solves the problem but paying off the minimum is only trying to survive and since the interest rates are usually compounding, your debt only increases as minimum payments won’t even ding the damn thing.
If you don’t want to get ahead financially, focus on paying off your debts first, and though you may not be able to pay off the debt in one year, make it a goal to pay it off as soon as possible.
The Federal Trade Commission has narrated an excellent example of why you should pay off your debts.
“Suppose when you are 18, you charge $1,500 worth of DVDs and clothes on a credit card with a 19% interest rate. If you repay only the minimum amount every month, you will be more than 26 years old by the time you pay off the debt. That’s 106 payments, and you will have paid more than $889 extra in interest.”
So, if you want to dodge the extra interest, you need to plan a debt repayment strategy.
Can You Pay Off Debt in One Year? Here’s How to Pay off Your Debt Fast
The first thing that you have to do is to determine the total amount that you owe. You’ve got to know the numbers!
Knowing the exact amount empowers you to plan an effective repayment strategy that works for you.
And there are various ways on how you can pay off your debts fast but whatever strategy you pick, you’ve got to keep debt repayment a priority and you have to hit it hard by paying off as much as you can, especially if you’re targeting to pay off your debts in one year.
The best way to do this is by using a debt-reduction calculator. You can download one for free from Vertex42, this is the same debt-reduction calculator I use to help my clients pay off debts fast.
With a serious commitment, discipline, and cash flow, the strategies you’ll find in this article works like a charm.
Here are the Steps in Paying Off Debt in One Year
Learn Your Numbers
As I mentioned, it is important that you know exactly how much you owe. It’s also worth mentioning that learning the interest rates of each of your debts and how much of your monthly income you should dedicate as your debt repayment budget are equally important.
Decide on Your Debt Repayment Strategy
These debt repayment strategies are systematic ways on how you can pay off your debts fast, hopefully in one year but I don’t know your exact debt situation so I can’t guarantee that you can pay them off in a year.
There are various debt repayment strategies available to you if you’re trying to eliminate multiple debts. If, on the other hand, you’re only dealing with one credit account, stop digging (i.e. stop charging more debts into that account), decide how much of your monthly income should go into paying off your debt, automatically transfer that amount into your credit card/line of credit or personal loan, the higher the amount, the better.
Pay more than the minimum.
The fastest way to drown in debt is by only paying off the minimum payments each month, on the other hand, you can quickly pay off your debt by paying the biggest amount you can afford each month. Keep on going ’till it’s paid off.
We will use the debt repayment strategies to slowly eliminate multiple credit accounts, one at a time.
If your debts total such a significant amount, this will be more of a challenge, especially if you’re barely surviving to maintain your cost of living and household bills from your take-home income.
If you are in this situation, work to increase your income, there are many ways on how you can earn extra money each month to help you pay off your debts fast.
Paying your debts fast helps you save a lot of money in interest because the longer it takes you to pay it off, the higher interest you’ll have to pay.
Again, pay as much as you can!
Paying more each month dramatically decreases your loan balance, thereby helping you rapidly come out of the financial hole you’ve dug yourself into.
Debt Repayment Strategies
The Avalanche method
The Avalanche method suggests listing all your outstanding debts and paying extra on the debt with higher interest rates.
Say, for example, you can afford $2,000.00 a month for debt repayment and you have the following outstanding debts:
- Visa Credit Card $16,059.84 at 13.99%
- Line of Credit $7,989.49 at 9.95%
- Line of Credit $4,66562 at 14.15%
- Visa Credit Card $5,000.00 at 0%
In the Avalanche method, you pay the minimum payment for all the lesser interest debts and put the rest of your budget into paying off the debt with the highest interest, which is the $4,665.62 line of credit in our example above.
Using the debt-reduction calculator, your debt repayment structure would look like this:
Technically, you’re going to pay off, $4,66562 first by channeling most of your debt-repayment budget into it and paying the minimum payments for the lesser interest accounts.
Gradually move your budget into paying off the next highest interest debt and so on and so forth until all debts have been paid off.
(The image below depicts this scenario, click for a larger view.)
The avalanche method would eliminate all these debts by January 2022, given that a budget of $2,000.00 was assigned for monthly debt repayment.
The Snowball Method
This method was introduced by Dave Ramsey. This technique eliminates the debt with the lowest balance first by making maximum payments, while paying the minimum payments for the rest of your debts.
To illustrate this method using our handy debt-reduction calculator, we’ll use the same debt balances as above and simply click on “Snowball” on the strategy drop-down list as below:
It automatically rearranges our list of debts, prioritizing the one with the lowest balance, regardless of the interest rates and as you may have observed, you’re going to end up paying higher total interest on this strategy compared to the Avalanche debt repayment strategy.
You may have not seen the difference because our highest interest debt is also the one with the lowest balance, so we’re killing the same debt with both strategies but if the highest interest debt differed from the one with the lowest balance, it will give you different debts to prioritize.
So technically, the concept is the same, we pay the minimum monthly payments for all the rest of our debts while smashing down the prioritized debt with the majority of our debt repayment budget.
The concept behind paying off first the debt with the lowest balance is psychological as it gives you a quick and fast win, convincing your subconscious that you can do it since you already took out one of your credit accounts.
Balance transfer
If your budget is a bit of a concern for now and the interest rates on your debts seem overwhelming, transferring your credit card balances to lower-interest credit cards gives you some breathing ground, at least, while you’re trying to increase your income so you have the extra money to fuel your debt repayment.
Depending on where you are, low-interest credit card offers may be available to you. Do keep in mind that these are promotional offers and that it doesn’t mean that the rates will remain the same forever.
As I mentioned, what you’re trying to do with this strategy is to build a breathing room so as not to get overwhelmed with high-interest credit cards that you may have.
The low interest usually lasts between 6 to 10 months, some credit card companies may offer longer low-interest periods but keep in mind that these companies are in the lending business and they do really hope that you forget about the dates when the low-interest offer expires, which brings you back to the same situation you’re already in right now.
What you should do is to grab these offers to take a break on some of your high-interest payments then implement either one of the strategies I mentioned above.
In my example, you may have observed that one of the debts listed has 0% interest rates, this depicts one of those credit card offers. (See image below)
“Visa 2” in our list of debts here, was a balance transfer offer of 0% interest. Take advantage of such offers and apply the debt reduction strategies mentioned above, this is the best way to reduce your debts fast and save on interest.
Debt Consolidation
Another option that can help you pay off your debts fast is debt consolidation.
There are two ways on how you can do this, one is kind of a self-determined option, where you approach your bank for a line of credit or a personal loan; you then pay off your higher-interest credit cards.
If you own a home and have equity in your home, you can also remortgage to pay off your other debts. What makes this effective is the fact that your mortgage has a lower annual interest than most consumer debts.
So, technically, what you’re doing is getting a single loan with hopefully, lower interest, and consolidating your debts into one. This is kind of a bandaid fix but it helps you save on interest.
If it’s a personal loan, you will have a pre-determined amount of monthly payment.
Another way of doing this is by applying for a full-on debt consolidation where you work with an institution to consolidate your debts.
Debt Management & Debt Relief Programs
If you can manage to pay off your debts using the strategies I shared above, avoid debt management and debt relief programs as these programs may come at a high cost, not only in terms of fees but on your credit score and standing as well.
Keep in mind that each time you approach third parties to help you with your debt situation, it affects your score.
What these companies do is liaise between you and your creditors, most likely, you will have to go through either a consumer proposal or bankruptcy, both are hard to recover from and will stay on your credit record for years.
It’s like throwing in the towel and admitting to your creditors that you’ve had enough and if they can forgive your debts or erase the interest, they then give you a “manageable” monthly payment plan where their fees are concealed.
Cut Down on Spending and Earn More
If you’ve dug yourself down with an overwhelming amount of debts, you may have spent more than what you can afford by buying things you don’t really need.
If you want to pay off your debts fast, you have to change your spending habits, so stop spending on unnecessary things, cut down your spending to the bare minimum.
Don’t buy stuff and put most of your budget into debt repayment instead.
Cutting back on costs frees up more cash flow.
It would also help if you could earn more. You can get a part-time job or start a side gig that makes you money so you can fuel those earnings into paying your debts faster.
Sell Stuff
Most of the things you have, you don’t really need. Selling things you don’t need will also help you earn extra money so you can pay off your debt sooner. Put every little dollar that you earn from selling your stuff into paying off your debts and you’ll be surprised as to how fast you can actually get rid of the shackles.
Sometimes, we don’t think that our crap is worth anything but often times than not, others are willing to pay to acquire other people’s junk.
Stop Digging
I’ve mentioned this at the beginning of the article and I think this deserves another mention here because it’s that important and if you’re short on cash it’s very tempting to keep on using your credit cards.
Continuously using your credit cards while trying to pay them off is counter-productive because you will never zero-down that debt, so you’ve got to stop digging!
If you’re seriously considering getting out of debt, you’ve got to leave those credit cards home, or even shred them all together to stop yourself from using them.
