It’s a tough time out there for recent grads—not only is the job market abysmal, but the average college student graduates with about $25,000 in student loans, as well as credit card debt on top of that. But don’t worry: a little strategic thinking and some creativity can go a long way to start digging yourself out of debt.
The first thing you should do when assessing your debt load is organize all the information on your various obligations. You can’t seize control of your situation without fully understanding it, and making it manageable—that means no more shoebox overflowing with late payment notices! Create a table like this:
Once you have your debts organized this way, it becomes easy to select between the two most common strategies for getting out of debt: paying off the debt with the biggest balance first, or the debt with the highest interest rate. While different plans work for best for different people’s unique situations, it’s probably best to focus on interest rates when prioritizing repayments. Don’t let a credit card rack up interest and fees while you’re focusing paying off a small balance, low-rate debt!
Of course, you may be thinking to yourself: that’s great, but where am I going to find the money to pay back any debt at all? This is the point when many experts would tell you it’s time to whip out your Excel spreadsheet and make a budget. But creating a strict, traditional-format budget generally does not work for most people.
Budgeting relies on discipline and impulse control—something many experts say we all have a finite amount of. Duke University Professor Dan Ariely, an expert in psychology and behavioral economics, describes the problem with budgeting as one of “ego depletion.” Ego depletion refers to the state where we do not have enough mental energy to continue to make good decisions. We arrive in that state, Ariely says, by making more and more decisions. He advises that the best way to insure ego depletion does not trip us up and derail us from our goals is to plan for certain indulgences and opportunities to release stress. Not, in other words, meticulously entering $3.67 into a spreadsheet every time you buy a latte.
So what do you do instead? The best thing to do is build a personal finance system for yourself that eliminates as many decisions as possible. You should automate your finances by taking your income—either your paycheck per month, or a smaller unit such as your next $100—and allocating each part of it to your financial goals. Once you’ve decided how much of your money should go where, find ways to get it there without you having to make the decision each time. Contributions to retirement accounts can come directly from your paycheck or checking account. Bills and loan payments can be paid automatically by your credit card. Remember the key to making this work safely is to monitor your credit card and checking account activity with care, and frequently reevaluate your financial priorities.
About NerdWallet: NerdWallet.com is one of the nation’s premier personal finance websites, using thorough research and numbers-based analysis to provide unbiased recommendations on credit cards, deposit rates, prepaid debit cards and more. Named Money Magazine’s best credit card website in 2010, NerdWallet has been featured in The New York Times and Forbes, and by consumer advocates Clark Howard and Liz Weston.