Money / Financial Planning
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With the first of seven potential federal interest rate hikes taking place last week, it’s a good time to evaluate your debt — and see how you can make short order of paying it off before rates soar higher.
See: 19 Ways To Tackle Your Budget and Manage Your Debt
Find: Suze Orman, Dave Ramsey and More Experts Give Their Top Advice About Getting Out Of Debt
The Fed’s increase in the prime interest rate won’t necessarily affect consumer interest rates across the board immediately, especially if you have good credit. But if you have adjustable rate debt, such as credit cards with variable interest rates or even an adjustable rate mortgage, it’s time to brace for yet another hit to your budget in the coming months as those rates could rise.
Psychotherapist and confidence coach Karol Ward recommends figuring out what will motivate you to pay off any debt faster. Are you motivated by punishment or reward? First, visualize what it would feel like to have to pay more interest, she told The Wall Street Journal. Then, visualize the feeling of having all your debt paid off. “You’ll recognize quickly by either feeling energized or discouraged which decision is best for you,” she said.
Once you’ve gotten yourself into the right mindset to pay down debt, you can take more practical steps.
Take Stock of Your Debt
Before you make a move, you’ll want to know exactly what you’re looking at in terms of your debt. Track down all your outstanding balances, credit limits, and the interest rates you’re currently paying.
Use a spreadsheet, a white board, or accounting software — whatever method works for you — to write down all the information.
Choose a Repayment Method
Experts typically recommend one of two methods to tackle debt: the debt snowball or the debt avalanche. Using the snowball method, you’ll pay off the smallest credit card balances first. Once it’s paid off, you’ll take the payments you were making on that card and put the money toward your next highest balance, and so on. The snowball method creates psychological victories early on that will inspire you to continue.
The avalanche method actually makes more sense from a practical standpoint, since you will focus on your higher interest debt first. However, if you can reduce all your interest rates with a 0% interest credit card or a home equity loan, the avalanche method may not be the best option.
Of course, in both cases you’ll want to continue making the minimum payments on all your cards …….