We all have financial goals, but there’s one uniting factor preventing us from reaching them. Whether you want to retire near a beach, send three kids to college, or travel abroad for a year, high interest debt can throw a wrench in your plans. And paying it down is easier said than done. Today, I’m partnering with the Texas-based Frost Bank on a must-have guide to tackling your debt. Whether you swiped your card on a large purchase or took out student loans to get through school, you’re not alone. There are steps you can take and resources you can lean on to help you through it. You’ve got this.
Phase 1: Prepare for your journey
Get in the right mindset.
The first step to accomplishing a daunting task is shifting your mindset. Remember those internal battles you fought with yourself in college? You had to study for that calculus exam, but the task was so intimidating, you couldn’t bring yourself to start. Paying down debt is similar, but one baby step goes a long way. First, acknowledge what you’re working with. Grab a journal. Write down every piece of debt you owe, the minimum monthly payment, and the interest rate. If you feel any visceral burden at this point, that’s totally normal. Channel that energy into resolve, and motivate yourself to pay it down.
Talk to a professional.
Many of us hire personal trainers to hold us accountable for our fitness regimens. Similarly, a financial coach can be a resource as you pay down debt and improve your financial security. While Frost offers secure bank accounts and seamless online and mobile tools, they also bring a personalized approach to banking through financial advisors. I had the opportunity to meet a Frost banker in person and left feeling encouraged and empowered. She was kind, understanding, and brought a level of professional knowledge and advice that made me feel comfortable and motivated. Think of these coaches as your personal cheerleaders. Whether you’re depositing your first paycheck, saving up to travel, dreaming of buying a home, or paying down debt, they will help you reach your financial goals.
Lower your interest rate.
High interest rates are the reason debt is so burdensome. The longer you owe money, the more your interest snowballs into an unmanageable amount. So how do you bring that rate down? Most people don’t realize that all you have to do is pick up the phone and ask. Credit card companies will often lower your rate if you do some homework beforehand. Research competitors’ interest rates and politely point out any discrepancies. Additionally, student loan servicers will typically shave off 0.25% if you set up automatic payments. It really is that simple.
You have some other options too, like consolidating or refinancing your debt. These can materially lower your rate, but they are complex and must be done carefully. Financial advisors like those at Frost Bank are there to help with these decisions.
Phase 2: Get to work
Create a budget.
To pay down debt, you have to trim your budget. There’s just no getting around it. Still, that doesn’t have to mean giving up on the things that make you happy. I like to use the 50/20/30 budget as a guide: 50% of your monthly after-tax income goes toward living expenses (housing, transportation, utilities, groceries, etc.); 20% is for financial goals like paying down debt and building an emergency fund; 30% is reserved for discretionary purchases that make you happy. Keep in mind that the 50/20/30 budget is a directional and proportional guide, not a strict rule. To turbocharge your debt paydown, you may want to allocate 30% of your income to debt, rather than the 20% guideline.
Some financial planners recommend prioritizing your debt in order of highest to lowest interest rate. That sounds efficient in theory, but another approach may actually be more effective. Consider starting with your smallest loan, regardless of interest rate. I promise, there’s a scientific reason for this. Our brains are wired to celebrate small successes. If you put an early win on the board, the drive to tackle your debt will only gain momentum. Trudging through a large loan can feel disheartening and crush your motivation, which is why we start small.
Automate your payments.
This step will only take a few minutes behind a computer. Go set your loans to auto-pay the minimum amount. After you decide which loan to start with, increase that contribution above the minimum. You can use the “financial goals” allocation from your budget as a guide. Frost Bank accounts make it easy to auto-pay, so you don’t have to think about manual payments every month. It’s important to do this because automation transforms your payments into a tangible reality. When cash is automatically deducted from your account, you are more likely to monitor your spending.
Phase 3: Maintain financially wise behavior
Stick to cash.
Swiping a credit card is easy…dangerously easy. Most of us are guilty of spending frivolously because a credit card eliminates the emotional tug of cash leaving our pockets. If you carry credit card debt or are prone to overspending, challenge yourself to use cash for one week. How does it feel? Did you spend less than you did the week before? Having a finite resource makes us more thoughtful and prudent in our expenditures. Using cash will get you back in the mindset of treating your credit like it’s limited.
Apply bonuses and raises to debt paydown.
Getting a raise or earning a year-end bonus is certainly cause for celebration. However, when you have high interest rate debt, applying a chunk of your excess income to principal paydown can save you hundreds or thousands down the road. Most of us are tempted to apply our excess cash to lifestyle improvements. And while I’m all for celebrating your successes, consider applying at least 50% of your bonus or raise to your debt.
For every milestone you reach in your debt paydown journey, celebrate! Treat yourself to a date night with your significant other. Pop some bubbly with your girlfriends. Savor some me-time and a spa treatment. You deserve it. Paying down debt requires self-control and sacrifice, and you have every reason to be proud of your progress.
this post is sponsored by Frost, photography by Chanel Dror
Click here to see more from Erica’s finance series, Money 101.
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