You + Overspending = Debt. This is why we need to budget! Just because budgeting is simple does not mean it's easy. Sometimes we fall into debt because we didn't make a plan and frequently overspend. Starting an emergency fund or savings account will help us prepare for emergencies like job loss or car accident. But sometimes it's too late because we're already in knee deep. The most common reasons for overspending are - mental mistakes, social pressure, and emotional spending.
Ever wonder why department stores always seem to have a sale going on? Retailers often set prices higher than normal then advertise at 40% off so customers feel like they got a great deal. You didn't actually get a deal! This is an example of a mental mistake that causes us to overspend.
What you can do:
For college students, this might be eating out with friends even though you have meal plan or food at home. It might be spending money to maintain an image and dress a certain way. No matter the scenario, learning to balance your finances with your social life/goals is critical.
What you can do:
This is when we spend money to cope with negative emotions or to achieve a positive emotion. If you have ever gone on an online shopping spree after a bad day or shopped because you were bored, you have experienced emotional spending.
What you can do:
Use strategies like the Debt Snowball and Debt Avalanche to payoff your debt!
The Debt Snowball method is basically a motivation hack. You focus your money on smallest debt first then work your way to the others. A small win helps you build personal momentum and see real progress towards your debt free goal!
How to Debt Snowball
| Loan | #1 | #2 | #3 | #4 | Total |
|---|---|---|---|---|---|
| **Balance | $225 | $550 | $650 | $1,575 | $3,000 |
| Interest Rate | 17% | 15.75% | 18.25% | 22% | - |
| Min. Payment | $15 | $30 | $55 | $100 | $200 |
| Month 1 | $115 | $30 | $55 | $100 | $300 |
| Month 2 | $115 | $30 | $55 | $100 | $300 |
| Month 3 | Paid | $145 | $55 | $100 | $300 |
| Month 4 | $145 | $55 | $100 | $300 | |
| Month 5 | $145 | $55 | $100 | $300 | |
| Month 6 | $145 | $55 | $100 | $300 | |
| Month 7 | Paid | $200 | $100 | $300 | |
| Month 8 | $200 | $100 | $300 | ||
| Month 9 | Paid | $300 | $300 | ||
| Month 10 | $300 | $300 | |||
| Month 11 | $300 | $300 | |||
| Month 12 | Paid | $0 |
The Debt Avalanche method is similar to Snowball except you start with the highest interest debt. This saves you money in interest. Small wins help you build personal momentum and see real progress towards your debt free goal!
How to Debt Avalanche
| Loan | #1 | #2 | #3 | #4 | Total |
|---|---|---|---|---|---|
| **Interest Rate | 22% | 18.25% | 17% | 15.75% | - |
| Balance | $1,575 | $650 | $225 | $550 | $3,000 |
| Min. Payment | $100 | $55 | $15 | $30 | $200 |
| Month 1 | $200 | $55 | $15 | $30 | $300 |
| Month 2 | $200 | $55 | $15 | $30 | $300 |
| Month 3 | $200 | $55 | $15 | $30 | $300 |
| Month 4 | $200 | $55 | $15 | $30 | $300 |
| Month 5 | $200 | $55 | $15 | $30 | $300 |
| Month 6 | $200 | $55 | $15 | $30 | $300 |
| Month 7 | $200 | $55 | $15 | $30 | $300 |
| Month 8 | $200 | $55 | $15 | $30 | $300 |
| Month 9 | Paid | $255 | $15 | $30 | $300 |
| Month 10 | Paid | $270 | $30 | $300 | |
| Month 11 | Paid | $300 | $300 | ||
| Month 12 | Paid | $0 |
Where do I find my loan balance?
When does repayment start?
Where do I find my monthly payment?
Who do I make payments to?
What are my payment plan options?
What if I am struggling to make my minimum payments?
