As in much of daily life, a lot of running a small business is about managing your finances. Most small businesses take on some kind of loan to get started or to fund an expansion, and many individuals have personal or consumer debt as well.
According to 2016 date from the Federal Reserve, Americans have $945.9 billion in unpaid credit card or revolving debt. That, in turn, means that each American has approximately $4,000 worth of credit card debt. That amount doesn’t include educational loans, auto loans, mortgage debt, and the like.
Whether it’s personal or business, carrying a large amount of debt can be stressful and may not be sustainable, leading to default and even bankruptcy. If debt is adding up, it’s easy to feel overwhelmed. So, let’s take a look at some ways to organize your debt and pay it off as quickly as possible.
What Needs Paying?
First, you have to figure out what you owe. You’ll need to:
- Gather all of your financial records, documents, and account information.
- Access your credit reports from the reporting bureaus. Check for debts that you may have forgotten and debts that are in collections.
- Write down all outstanding balances and loans, include interest rates and monthly amount of debts. Note which of your credit cards or loans have higher APRs, so you can focus on those first.
- Create a spreadsheet listing all credit cards, debts, and loans, including balances and interest rates. Figure out the total amount you need to pay each month to stay current.
- Add your other expenses to that spreadsheet – food, entertainment, clothing, medical care, supplies, etc. Figure out how much you’re spending each month aside from debt payments, then add those two numbers together to get your total spending.
- Compare that number with your income – do you have enough to cover everything or are you coming up short?
It’s the same process for personal as business debt – the first step is to really get a handle on your financial situation.
Creating a Personal Budget provides more detailed information on setting up your budget. Creating a Small Business Budget shares details on how to draft your small business budget to stay on track with expenses and debts. If you need help tracking and organizing your monthly finances, Wells Fargo’s monthly expenses worksheet is a helpful resource.
Make A Plan
If you’re bringing in enough to cover all of your debts and expenses, you’re in good shape! You just need to be careful to stick to your budget and be sure to make your payments on time and in full every month.
If not, you need to set up a plan for paying off that debt as quickly as possible to get you back in the black. For many types of debt, you can actually work with your lender to have your interest rates lowered or put off payments for a few months – it’s more trouble for them if you default and they’re often willing to set up a plan to make your payments easier. Note that this is less common for business debts, but it never hurts to ask. Many people are afraid to call and admit that they’re struggling with payments, but lenders actually appreciate it. You can work something out before you fall behind. So, call your mortgage lender, auto lender, bank, and other creditors to ask about your options for lowering your payments. In addition to changing the interest rate or duration of a given debt, they may suggest refinancing or bundling some debts. In some cases, that can make payment easier, but make sure to read the fine print and figure out if it’s actually an improvement.
You should also look into transferring your credit card balances to take advantage of lower rates. Some credit card companies offer 0% promotional rates for qualified customers. One caveat: be wary of additional fees. Some credit card companies charge additional fees of up to 3% to transfer balances. Read the fine print to make sure that you’re getting a good deal. Check out Best Cards with 0% Balance Transfer APR. for more information on low or no-interest credit cards.
If you’re struggling with federal student loan debt, be sure to take advantage of their many different repayment plans. They offer a variety of income-based repayment plans and people working in certain professions may actually have their loans forgiven.
Start Making Payments
Once you’ve made your payments as manageable as possible, it’s time to start paying down that debt. If you’re still going to struggle to cover it, you may need to adjust your spending to try to free up cash for those payments. A little budget pinch now can save you a bundle later, so it’s worth it.
The best way to pay down debt quickly is pretty obvious – pay more than you have to every month. At the very least, you need to keep up with all your payments. But if you have a little extra left over, funnel that cash toward paying down your debt.
There are a number of different strategies for choosing which debts to pay down first. Some experts suggest going for the debts with the highest interest rates (usually credit cards) since they’re racking up the most in interest payments. Some suggest going for the biggest debts, since even a low interest rate on a large amount can shake out to big payments. Others suggest the “snowball” approach, where you pay off the smallest debts first and work up to the big ones. That gives you the satisfaction of starting to pay things off quickly, as well as making life simpler by giving you fewer bills to track.
In general, it’s probably a good idea to take on the debt that’s costing you the most in interest, whether it’s a small debt with a high rate or a large debt with a low rate. If all of your debts have similar rates, then the snowball approach is a good way to get on track.
Beware Quick Fixes
There is no silver bullet for paying off your debt on the spot, short of winning the lottery. It’s just about setting up a sensible plan and being disciplined about sticking with it. That’s not particularly exciting or fun, but it is the way to get it done.
Unfortunately, there are a lot of organizations out there offering “debt relief” programs that promise to cut your payments in half or wipe out large portions of your debt. Buyer beware – many of those companies are scams. They’ll ask you to pay fees or a large lump sum with the promise of settling your debt, but they don’t actually have any power over your lenders and you may end up losing that cash.
Some organizations are actually there to help you create and stick to a plan and may be able to guide you through working with your lenders, but you need to be careful of the unscrupulous ones. Do your research online before accepting help from those types of organizations.
For most individuals and businesses, debt is simply part of life. But it can also be a scary part, looming over you and threatening your financial future. The good news is that with some careful accounting and discipline, you can steadily get rid of those debts. And working with your lenders may make your repayment timeline a lot shorter!