Editor’s note: This is the third in a four-part series on year-end financial planning designed to help you close out the year on a high note.
At this time of the year, I typically spend quite a bit of time on the steps necessary to avoid adding to your debt by overstepping on the holiday shopping front. However, if you have done your year-end assessment and find yourself with a balance-sheet problem, there’s no better time than now to get serious about paying off debt.
Debt, especially high-interest consumer debt, can create stress and wreak havoc on your finances. From wallet-draining interest payments to the cold reality of limiting your ability to build wealth, debt is a true Grinch. Taking control of it before the new year starts allows you to enter the next 12 months with a cleaner slate and a clearer path to financial freedom. That would be something to celebrate during the holiday season.
Step 1: Organize and Prioritize
List all your debts, from mortgages and student loans to credit cards and personal loans. Include the interest rates, minimum payments and total balances owed. This helps you visualize your entire debt landscape.
Once listed, prioritize which debts to tackle first. Many people prefer the "snowball" method in which you pay off the smallest balance first to gain quick momentum. Others prefer the "avalanche" method, focusing on the highest interest rates to minimize total interest payments. That’s our preference here at USAA, but take the approach that works best for you.
It might go without saying, but I’m going to say it twice in this column: One of the key elements of this first step is to avoid adding to your debt. So when you think about priorities, Priority No. 1 is doing what’s necessary to halt accumulating more debt.
Step 2: Create an Aggressive Repayment Plan
A good year-end debt review isn't just about understanding what you owe. It’s also about creating an action plan to eliminate it. Reallocate any extra funds found during your initial budget review to your highest-priority debts. Consider cutting back on discretionary spending or using holiday bonuses or gifts to make extra payments.
If you’ve made significant progress on debt this year, reward yourself with a small treat. If not, keep your nose to the grindstone and get serious about following through with your plan.
Step 3: Review and Refinance
Interest rates fluctuate, and if you've had the same loans or credit-card balances for a while, now may be a good time to refinance. Explore options for consolidating high-interest debt into lower-interest loans. This could free up some cash flow and accelerate your debt repayment. However, before going down this path, make sure you’ve addressed any root causes of the debt you’ve accumulated. The last thing you want to do is consolidate debt and end up, in weeks or months, with a consolidation loan and more debt.
Step 4: Avoid New Debt
As tempting as holiday spending can be, avoid taking on new debt. If you can’t afford it, don’t buy it. Be mindful of your spending during the festive season, and keep your long-term goals in mind. A year-end debt review allows you to set the tone for the next year -- one where you're proactive about staying out of debt rather than reactive.
While you may not dig all the way out of debt in 2024, you can clearly chart a path that will allow you to get there early in 2025. Good luck!
Other parts in the series:
- Your Year-End Financial Action Plan, Part I: Setting the Stage
- Your Year-End Financial Action Plan, Part 2: Stay Ahead of the Tax Man
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