8 Questions to Ask Before Paying Off Debt
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The new year is right around the corner, and with it, a slew of resolutions. If you’re like me, you’re thinking of making 2016 the year of debt freedom and are paying off debt completely. Or maybe you’re simply vowing to double down on your debt repayment efforts to get there quicker.
Committing to improving your financial situation is always an exciting time (or it should be!). You’re looking forward to a new start; a life where you’re not stressed about money 24/7, where you’re not worried about opening the bills that come in the mail and where you can face any emergency head-on because your savings are enough.
There’s one little thing you should know before starting, and it’s something no one wants to believe, but everyone will face: your enthusiasm won’t last.
Unless you can accomplish your goals in the span of a few months (which isn’t true for most people), your enthusiasm will wax and wane, and paying off debt is no different. If you go into it with unrealistic expectations, you’re only setting yourself up for disappointment.
Don’t worry – asking yourself these eight questions before paying off debt will give you a better picture of what to expect!
#1 – Why am I Paying Off My Debt?
First, you need to get clear on why you’re paying off your debt, and frankly, that reason should be intrinsic. You should be paying off debt for yourself or your family. Not because “it’s the right thing to do” or “because my financial planner told me so.” Those aren’t strong enough reasons to get you through the tough times.
Some people have a concrete reason right off the bat, and others may need to think about it. That’s fine! Take five minutes or so to drill down into why you want this burden gone. What are the benefits of paying off debt for you?
There’s no right or wrong reasoning here, but the reason should be meaningful. Additionally, if you’re paying off debt jointly with your spouse or partner, make sure you’re on the same page! You can both have your own reasons for paying off debt, but there should be one or two common threads.
#2 – How Much Can I Afford to Pay?
This is where the “realistic” part comes into play. So you want to pay off debt, great! At what rate? How much per month can you afford to throw at your debt?
I’ve written before about how this can fluctuate based on your circumstance, and that’s totally okay. But you should at least aim to have a base amount you can pay toward your debt to get you started.
If you haven’t already, get a budget together to figure out what your expenses are each month (include your debt). Add up your income, and subtract your expenses from it. You can even use a free tool like Personal Capital to help you automate your tracking as much as possible.
Do you have enough money left to pay extra toward your debt? Do you have enough to pay your minimum balance? Ideally, how much would you be paying per month? Figure the logistics out before moving on.
#3 – Why Did I Get Into Debt in the First Place?
Not all debt is equal, and there are many ways to acquire debt. Did you take out too much student loan debt? Did you run up your credit card because you couldn’t afford to pay cash for things? Did your health insurance not cover a hospital stay?
Consumer debt is a different beast than student loan or medical debt. Those are (hopefully) debts you’ll only take on a handful of times in your life. Neither is indicative of a spending problem.
Consumer debt is. You need to get to the root of why you got into debt in the first place so it doesn’t derail you from making progress toward freedom. Identify your spending weaknesses and figure out ways to avoid temptation. If you’re paying an outrageously high interest rate on your consumer (credit card) debt, it might make sense if you have no savings built up, can’t cut any more from your budget and are committed to changing your spending habits to fit what you can realistically afford and support your debt payoff journey, to consider taking out an unsecured personal loan, as in some situations they can be beneficial.
#4 – How Do I Plan on Getting Out?
You can’t pay off debt without a plan, plain and simple. Your strategy doesn’t have to be crazy, but you should have a rough outline to follow.
Your first stop is choosing how you’re going to pay off your debt. Do you have multiple debts? Do you want to pay them off smallest to largest in terms of balance? Highest to lowest interest rate? Whichever one you hate the most?
Pick a path and try to stay on it until it no longer makes sense for your situation or it ceases to be effective. I say this because life happens (see #6) and things change. It’s smart to evaluate your plan from time to time!
#5 – How Realistic is This Plan?
This is a short one. When you’ve decided on how you’re going to pay off your debt, go back to your answer to question #2 and make sure everything aligns. If you want to pay extra toward your highest interest rate or lowest balance, do you have enough money to do so?
If you fall short, seek out ways to decrease your expenses and increase your income. You need to figure out a way to make your plan come to life.
#6 – What Other Commitments May Get in the Way?
I spoke about this briefly in another post, but in the three “short” years I’ve been paying off my student loans, life has gotten in the way. I haven’t even purchased a house, given birth or been married – all three major life events that tend to hold those with student loans back.
Your situation may be different, though. Becoming a homeowner could be important to you, and you may want to put your extra money toward saving for a down payment instead of your debt.
Again, things change, but take a moment to list out the major milestones ahead for you and how they might impact your debt payoff journey. Consider how you can move your money around to make sure your plans don’t get derailed.
#7 – Who Will Support Me?
I don’t mean financially, I mean mentally. We already talked about the benefits of getting a financial accountability partner, and this is a great idea when paying off debt.
Do you have any friends or family members who might be bad influences? Those who will invite you along to a shopping outing, night out on the town, or expensive restaurant? How will you cope with that?
You should focus on surrounding yourself with a supportive network of people who can get behind your goal of debt freedom and push you toward it (and help you stay away from bad financial decisions!).
#8 – Can I Forgive Myself for MY Mistakes?
This last question is where you need to get real. You will make mistakes along your journey – all of us do. It’s how you react to them that makes a difference.
Will you let a mistake get you down to the point where you give up? Or will you learn from it, put it behind you, and continue on? This can make or break your chance at debt freedom. Forgiveness and hope are necessary when paying off debt.
Did you ask yourself any of these questions before paying off debt? Or did you ask them as you went along in your journey? Do you think it’s smart to be realistic about your debt pay off before beginning?
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