According to the Federal Reserve Bank of New York, U.S. household debt surged to a record $14.3 trillion in the third quarter of 2020. While the majority of that load is mortgage debt, Americans are still burdened with student loan, auto loan and credit card obligations that continue to place stress on family budgets, a problem exacerbated by the extraordinary economic hardships from the pandemic.
If you are looking for help on how to tackle a mountain of debt, here are a few tips to get started.
First and perhaps most important is to establish a budget. It need not be overly detailed, but you need a baseline to help determine where the leakage is coming from. Begin by writing down every expenditure for the past three months and comparing with your cash inflows. At that point it will be easier to identify potential targets for cutting back and to stop digging the hold deeper. You may be surprised at how much little things like a trip to Starbucks add up over a year. And by all means, curtail any non-essential additions to those credit cards. There are numerous budgeting apps on the web that can lend a hand if you don’t know where to start or just want to make the process more fun.
Next, establish a plan to begin attacking your debt pile. The most logical and cost-effective method is often referred to as a “debt avalanche”, in which you make the minimum payment to all accounts but the one with the highest interest rate, and then dedicate as much as possible each month to knocking that one off. Proceeding in this manner saves you the most in interest over time.
Alternatively, some people have found success with the less efficient but psychologically rewarding “snowball” plan, under which you attack the smallest obligation first (maintaining the minimum payment on all others). The theory here is to gain momentum earlier like a snowball rolling downhill. In the long run, the most important consideration is which method you are most likely to stick with.