How to manage your debt

Yes, it’s true: spending money is fun. Buying a new TV, treating yourself to a massage, taking a vacation—all of these things can feel, well, awesome. Especially when you’re rewarding yourself for the hard work you do. But going into debt to be good to yourself? That takes a little of the shine off the experience, doesn’t it? Fortunately, it’s possible to enjoy life and manage debt, at the same time!

You’re a grown-up, so you probably don’t need to be reminded why racking up debt is a bad idea. But it never hurts to recap a few ways to rein in your personal debt and stay on track to help meet your long-term goals:

• Start with a list. Write down what your current assets are and what your current debt is. Write each source of debt separately - the amount owed and the interest rate.
• Set up a budget to track your expenses and spending. Try our online Budget Calculator to get started. It’s easy to use and it even gives you a chart showing where your money is going.
• Use cash for everyday purchases like groceries and eating out. You’ll automatically start to rein in your spending when the money comes right out of your pocket.
• Carefully monitor your credit card spending each month. Try not to spend more than you can pay off in full each month. The average credit card interest rate is around 19.6%, which will rack up extra debt for you quickly¹.
• Pay more than the minimum amount due. Paying just the monthly minimum on credit cards can add extra years to pay off your balance because of all the additional compounded interest you are paying. Which equals more money you owe.
  • If you owe $1,000 and just pay the minimum (say $50 a month), on average, it will take you two years to pay it off, and you'll wind up paying an extra $212.
• Pay off the credit card with the highest interest rate first. Then pay off the card with the next highest rate. You want to pay off highest interest rates first because they eat up more of your income.
• Pay off credit cards and short-term debt before paying off home mortgages. Interest paid on short-term debt is not tax-deductible. But mortgage interest is.
• As you pay off your credit cards, keep paying into your savings and retirement plans. If you don’t have a retirement plan, it’s easy to open up an IRA account. An IRA lets you save for your retirement without paying taxes on the money your savings could earn while in the IRA.
• Avoid paying off credit cards by borrowing against your home or 401k. Your home and retirement are important assets. Try not to put them at risk.

A little debt is OK (and sometimes unavoidable). It’s part of life. The key is to manage debt while you continue to save. Create a balance and you can treat yourself now and then, while preparing for bigger goals like buying a home, tuition, retirement and more.

1 Investopedia, as of June 2021