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5 steps to understanding and managing your debt

If you feel burdened by debt or just want to see if you can become debt free, the key is taking it one step at a time. Start by understanding how you came to rely on debt, and then you can move toward creating and executing a plan for working your way free of it.
 
1. Tally up your debt
Your debt-reduction plan starts with figuring out how much you owe and categorizing it. Remember, not all debt is bad. Some debts, such as mortgages, may let you and your family reach important life goals. Make a list of all your nonmortgage debts, such as credit cards, student loans and auto loans. For each, write down the outstanding balance and the interest rate.  
 
2. Understand your spending
To reduce or eliminate your debt, you need to understand why you got into debt in the first place. Maybe you took out student loans to pay for college or used a credit card to cover a one-time medical emergency. However, many people are in the red for one simple reason: They spend more than they make. Track every item you buy for a month to help you understand your spending. It may help you find patterns that you can change.
 
3. Reduce expenses and create a budget you can maintain
Now that you know what you’re spending money on, look for ways to reduce and eliminate expenses. Separate needs, such as utility costs and gas for your car, from wants. Can you switch to a cheaper cellphone plan? Drop your gym membership and work out at home instead? Create a budget that you can review each month to make sure you’re sticking to it. Over time, small savings add up, and reducing spending may leave you more discretionary money to use to pay down your debt. Include at least the minimum amount for your debt payments as part of your budget.
 
4. Determine your debt pay-down strategy
One option, known as “debt avalanche,” is to first pay a little extra toward your debt with the highest interest rate. When you’ve paid down that debt, apply that amount to your next debt with the highest interest rate, and so on. This approach helps you pay off your debt while paying the smallest amount of interest. Another approach, called “debt snowball,” is to knock out debts starting with the smallest balance first.  Whatever approach you choose, be sure to consider any income tax benefits, such as deductions on interest that you may be paying, before deciding which debt to pay first. Stick with the strategy you choose and try not to incur new debts as you’re paying down the existing ones.
 
One notable exception to these approaches is if you are working toward federal forgiveness of student debt. In that case, it’s recommended that you review the eligibility requirements carefully to understand your ability to have your student loan forgiven, such as paying the exact monthly payment amount due to your servicer.
 
5. Establish good financial habits
Once you have a plan, make sure you’re paying on time and making at least the minimum payments on all your debts each month. Late payments can hurt your credit score. Avoid creating more debt for yourself whenever possible and stick to your budget. Any time you get a windfall of extra cash, such as a bonus or tax refund, put the extra money toward your debt.
 
As you continue to make progress on reducing and eliminating your debt, you will build confidence and momentum. You may have some setbacks, but don’t give up. Reward yourself when you meet payoff goals and remind yourself that eliminating your debt will put you on your way to financial freedom and living the life you want.
TIAA does not provide tax or legal advice. This piece is being provided for educational purposes only and does not constitute a recommendation or advice. You should carefully consider your unique circumstances before making any decisions regarding your student loans.
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