Debt is a very real issue for Americans. According to data from Credit Sesame, the average 25 to 34 year old owes more than $21,000 in student loans and has a credit card balance of close to $3K. Translation: Millennials are overwhelmingly in debt.
You don’t have to accept this financially burdensome state as inevitable. There are ways to tackle your mounting debt head-on. We called on millennial money expert Stefanie O’Connell, author of The Broke and Beautiful Life, for advice on how to break out of this challenging financial rut, and here are five tips she had to share.
1. Be proactive
Delaying the inevitable will get you nowhere. “Push past the fear of tackling your bills and face the numbers,” O’Connell says. “Be aggressive with your debt repayment plans and don’t settle for minimum payments.”
2. Pick the right payment strategy
When it comes to debt payoff strategies, O’Connell explains, there are two popular options: the debt snowball and the debt avalanche.
The debt snowball is great for people who tend towards instant gratification, because you get to see your various debts fall off your balance sheet, smallest ones first.
O’Connell explains how it works: “With the debt snowball method, you pay the minimums on all of your debts, and anything more you can afford to put towards your debt repayment each month, you pay toward the debt with the lowest balance first. Once that debt is paid off, you don’t reduce the [total] amount you put towards your debt pay off each month, rather, you put the total force of your debt repayment towards your minimum payments and the debt with the next lowest balance, gathering momentum as you pay off each small debt and are then able to make more and more progress toward paying off your larger debts.”
The way the math checks out, the debt avalanche is the best for your bottom line, prioritizing knocking out the high-interest debts first.
With the debt avalanche you also need to pay the minimum on all of your debts each month, “but you put anything over and above the minimum payment toward the debt with the highest interest rate first,” O’Connell says. “Once you eliminate that debt, you focus on the debt with the next highest interest rate, then the next and the next until you get all of your balances down to zero.”
Neither one is better than the other, O’Connell explains.
“The key differentiator here is the order in which you pay off your debts,” she said. “By tackling the debt with the lowest balance first, as you do in the debt snowball, you get the psychological boost of progress and momentum when that debt gets paid off, keeping you motivated through the debt repayment process. But the debt avalanche is the more cost effective strategy, because you tackle the debt with the highest interest rate first, and the higher the interest rate, the more expensive the debt is over time. So when you pay off debts with high interest rates first, you end up saving money in the long run.”
The key is finding the one that will work best for you. O’Connell stresses that it’s important to stay accountable, no matter which method you choose: “In both strategies, you must make the minimum payments on all of your debts each and every month to avoid default, late fees and hurting your credit.”
3. Make “in debt” your lifestyle
“Debt has to go from being something you procrastinate to something you prioritize,” says O’Connell. “And a priority is something you build your life around, not something you fit into your life if you can find the space, time, energy, or money.”
4. Be patient with your debt (and kind to yourself)
“If you have a setback along the way, it’s ok; it’s temporary,” O’Connell says. “Be patient and kind with yourself as you work through the process and don’t get too distracted by other people’s financial journeys.”
5. Celebrate every victory along the way
“Every time you send a payment in on time or pay more than the minimum due — that’s a win for you and your debt,” O’Connell says. “Recognize it by tracking your progress visually in a place that you see every single day, like your refrigerator, and celebrate each step in the right direction.”