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7 Research-Proven Strategies That Can Help You Finally Get Out of Debt

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Digging out of debt is a fairly common New Year’s resolution. The average consumer racked up $1,054 worth of debt during the 2017 holiday shopping season, according to a recent MagnifyMoney survey.

Even if you didn’t use credit to fund your holiday festivities, you may still have other types of debt you plan to finally get rid off in 2018 — like auto debt, student loan debt, or even that new iPhone you might have financed.

Becoming debt-free often requires a lot of effort and discipline. But it’s not impossible, especially if you find a good strategy for your needs. Here are some practical, research-proven tips you can use to make reaching your goal of being debt-free more attainable in the new year.

Tip #1: Pay off one account at a time

In a 2016 study published in the Journal of Consumer Research, a team of four researchers found that focusing on one debt at a time helped consumers pay off their debt more quickly than those who paid multiple debts at once.

The researchers tested the efficacy of paying one account at a time. Consumers were divided into two groups: one whose payments were distributed equally among their debts, while the other paid one account at a time.

They found that participants who used the concentrated repayment strategy “worked harder than those who dispersed their repayments” and repaid their debt 15% faster. Participants who used the concentrated strategy felt more motivated as well, as they “perceive greater progress toward their goal of getting out of debt,” which boosted the desire to succeed.

Tip #2: Start paying down debts with the smallest balance first

The same research also helped to finally settle the debate between two well-known debt repayment strategies — the debt snowball and the debt avalanche. Both methods agree on the concept of paying one balance off at a time but diverge on how to prioritize the debts.

The debt avalanche strategy advises debtors to prioritize debts by interest rate, focusing on paying down debts with the highest interest rate first. Hypothetically, by using this approach, the borrower saves the most money over time simply because they’re avoiding higher interest charges.

However, researchers found the debt snowball strategy works better in the long run. Borrowers are advised to order their debts from the smallest to largest amount and tackle the lower debt first. The portion of the balance debtors succeed in paying off has the largest impact on their perception of progress, so people are more motivated when they begin with the smallest debt.

“To the extent that a consumer’s debt accounts have similar interest rates, he or she should concentrate repayments first on the cards or accounts with the smallest debts, paying off those first,” wrote Boston University researcher Remi Trudel in a 2016 Harvard Business Review article.

Trudel goes further to suggest consolidating multiple debts into one may actually weaken motivation and could slow repayment progress. However, debt consolidation may be helpful overall if consumers are able to greatly lower the interest paid on all of their debts through consolidation.

>> You can learn more about debt consolidation here!

Tip #3: Set a no-plastic rule for transactions over $20.

A 2017 joint study completed by Urban Institute, D2D Fund, and the Arizona Federal Credit Union, and funded by the Consumer Financial Protection Bureau (CFPB), found that by using cash for purchases under $20, consumers were able to lower the amount of credit card debt they carried over month to month. We’ve shared this tip with you before.

Revolving credit card debt can have a huge impact on your credit score and the cost of credit in general. The less month-to-month credit debt you carry, the better. Learn more about achieving an excellent credit score here.

You can borrow the CFPB’s rule as well. You don’t necessarily have to use the $20 limit, but it’s a solid starting place. Try keeping a $20 bill on you to prevent yourself from accumulating more debt while you work on paying it off. If a transaction falls under $20, you can use cash instead of swiping a credit card.

Urban Institute researchers monitored the habits of nearly 14,000 Arizona Federal Credit Union account holders identified as credit card revolvers — those who had carried a balance on their credit card for at least two out of the six months before the start of the study.

Researchers used two rules of thumb:

  • Don’t swipe the small stuff: Use cash when it’s under $20
  • Credit keeps charging: It adds approximately 20% to the total

The participants either received one of the two rules to follow, or they were placed in a control group. They were then reminded of the rule they were to follow via email, web portal banners, and refrigerator calendar magnets for six months in 2015.

They found participants who followed the first rule saw on average a 2% decrease in their Arizona Federal Credit card balances, compared to those in the control group.  After six months, the $20 rule followers’ balances were on average $104 lower than they were prior to the study.

Tip #4: Set up accountability reminders

Getting someone (or something) to send you helpful reminders to pay down your debt can help you become more motivated to pay it off, according a 2015 study by Clarifi, a nonprofit organization that provides consumers low-cost access to financial products and services.

Researchers worked with clients to test the effects of text messaging and peer support programs on their financial outcomes. The researchers randomly selected individuals to receive peer support, reminder text messages, or both.

Those offered peer support choose one to two peers to monitor their progress on a debt management plan. The peers they chose received updates on their progress and a notification when they missed a scheduled debt payment.

Participants who received text message reminders were subscribed to a messaging service they could opt out of. They received either task-oriented or goal-oriented messages, either bi-weekly (high frequency) or once a month (low frequency) and a week before each debt management payment was due.

Researchers found those who received bi-weekly task-oriented reminder messages were 6% more likely to be on track with their debt management plan and 8% more likely to have met their scheduled payment amount or completed the debt management plan in any given

month than clients who received no reminder messages.

You can mimic this effect by setting up bill pay reminders on your recurring monthly bills. You can download the mobile app for most banks, for example, and set a reminder to alert you when your bill is coming up or when a transaction is charged to your account. You can also use a number of mobile apps, like Clarity Money or Mint that will alert you if you are overspending in areas of your budget.

Tip #5: Treat all money the same

According the mental accounting theory held among behavioral economists, when people treat money differently depending on how they receive it.

And that could be ultimately hurting your progress toward paying down debt.

For example, let’s say you always consider your tax refund as a means to pay for your annual vacation. Even if you have some credit card debt to pay down, you’re mentally designating your tax refund toward your vacation spending, overlooking the fact that you might be better off using that money to pay down your debt instead.

Or, you may not even consider taking your annual bonus and using it to pay off your auto loan, but instead, use the cash to buy yourself a new gadget because it seems like the kind of treat a bonus should be used for. You may be current on your auto payments and in no rush to pay off your vehicle, but that money could have been used to pay off the auto loan and save yourself a chunk of interest payments.

The trick is not to mentally allocate that money toward spending when it may be more beneficial to allocate it toward debt, considering what the debt would cost you.

In short, treating all of your dollars with a holistic approach, asking yourself how you can use them in the best possible way to improve your total financial outlook, may help you pay off your debts faster.

Try it now. Think of money you’ll receive soon like a bonus, a refund, or reimbursement. Have you already decided what you’ll spend it on? If you have, think before you spend. Can that money better serve another area of your life If you haven’t spent the incoming money (in your head) already, good work. Now, weigh your options. Look at all of your accounts and consider your financial goals, then choose to put the money to use where it makes the most fiscal sense.

Tip #6:  Practice money mindfulness

Keeping track of where and how you are spending your money could help you spend less of it, and use those savings toward your debt, according to a 2009 study on the intersection of mindfulness and financial well-being.

Researchers looked into whether practicing mindfulness — a state of receptive attention to present events and experience —would promote more modest wealth-related desires.  They found mindfulness was associated with a smaller financial desire discrepancy, meaning those who practiced mindfulness were less likely to experience discrepancies between what they have financially and what they want.  Mindful money managers consequently experience a higher level of subjective well-being.

In the study, Knox College psychology department chair Tim Kasser argues mindfulness can better a consumer’s relationship with money. Since they would learn to be content with the money and assets they currently have, mindfulness practice could reduce the influence of advertising and materialist motivations to swipe a credit card.

Making an effort to stay on top of when, how, and why you are spending or saving money may help you notice your feelings, strengths, and weaknesses related to financial management. In turn, practicing mindfulness could help you pay off and stay out of debt.

Stopping to consider if a purchase less than $20 is worth swiping your credit card is one way to practice mindful spending. You could also make an effort to pause before a purchase and ask yourself if it is a need or a want. If the purchase is no a ‘need,’ then you may be better off waiting a couple of days, or deciding not to make the purchase at all. Switching to using cash-only for day-to-day purchases is an easy and quick way to bring awareness to your spending, too, since you can see and feel the money being spent as opposed to using a credit or debit card.

The Joy app, launched by behavioral finance company Happy Money, specifically uses psychology to encourage money mindfulness. The app tracks spending and has users rate each transaction with a smiley face or frowning face, then shows the user their spending stats based on what they input over time.

Tip #7:  Nudge yourself along the way

The power of “nudges,” as coined by Nobel Prize-winning behavioral economist Richard H. Thaler, received a lot of attention in 2017.

“A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives,” described Thaler in “Nudge – Improving Decisions about Health, Wealth and Happiness.”

Nudges are different from financial rules of thumb (like saving 10% of your income for retirement, or six months’ worth of expenses for emergencies). Nudges are not rules but rather simple interventions. For example, placing gum and candy at the checkout counter nudges you to add these items to your purchase, or putting your keys by the door in your house nudges you to remember to grab them on the way out.

Nudges make it easy for you to not think about doing what the nudge wants you to do.

You can create nudges to pay down debt as well. Put your money-tracking, credit card, and other banking apps on your cellphone’s home screen, so that you are more likely to check on your funds.

Hide your cards from yourself (or literally freeze them) so that they are out of sight and  thus not your first payment option. If you’re a serial online shopper and you’ve memorized your card information, order a replacement credit card and tuck it away.

If you know you spend more money when you walk up and down the grocery store aisles in person, order the groceries you need online and pick them up at the store with a service like Instacart. You save time, and avoid paying delivery fees and overspending.

The key is simple: Know thyself, and make it more difficult to become the version of you who is stuck in revolving debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

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How to Save on Back-to-School Shopping

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock
Parents often revel in the calm and quiet that comes when kids head back to school, but they aren’t likely to enjoy the excess spending that also accompanies the back-to-school season. According to the National Retail Federation, parents will set a record in 2019, spending an average of $696.70 per household on children in elementary school through high school.

 

“It was interesting to see the across-the-board increases in spending levels,” said Mark Mathews, vice president for research development and industry analysis with the NRF. “Elevated levels of consumer sentiment, healthy household balance sheets, low inflation and recent wage gains all seem to be contributing to a confident consumer who is willing to spend money on back-to-school supplies.”

If you’re planning a trip to the store before classes start, there are a few ways to curb the spending and save some bucks.

Plan ahead

No parent should set foot out the door for back-to-school shopping without first taking stock of what they already have. Plenty of old supplies from previous years might still be usable, especially arts and crafts items like crayons, pencils and pens, as well as more expensive things like backpacks, lunch boxes and calculators.

Crossing a few items off your list is a good first step when it comes to saving, but learning how to budget is also important. It’s tempting to run down the back-to-school aisle and grab every colorful notebook and snazzy pencil case in sight, but it doesn’t make a lot of financial sense. Create a realistic budget based on the items you actually need, and try your best to stick to it. If possible, do most of your shopping online, since it’s easier to keep a running tally of how much you’re spending as you shop.

Be smart about sales

Although you’re bound to run into many back-to-school sales this time of year, you don’t need to buy 12 notebooks just because they’re cheaper right now. In fact, you shouldn’t assume the sales price is the best price at all, said consumer savings expert Andrea Woroch. Instead, always comparison shop.

“Run a quick Google search online or on your phone to see if another store is selling the same or a similar item for less,” she said. “Most big box stores will price match, so you won’t even have to drive to another store to get the better deal.” For example, Target, Staples and Walmart all have price matching policies.

Clip coupons and shop discount stores

Coupons have definitely made a digital comeback, with countless apps and websites dedicated to listing all your options in one place. “Spending a few minutes looking for coupons can help you get a better discount,” Woroch said. “Use apps like CouponSherpa, for instance. Or, use the Honey browser tool, which automatically searches and applies relevant coupons to your online order.”

Many stores also offer discounts to valued customers who sign up for their rewards program, like Walgreens and CVS, while craft stores like Michaels regularly offer discounts. Don’t knock purchasing basics like paper and writing supplies from the Dollar Tree, either — you might be surprised by what you find, and those types of items are often the same quality wherever you buy them.

Tax advantage of tax-free holidays

On select dates throughout the year, different states offer state sales tax holidays, or days where you can purchase items without having to pay sales tax on them. You can find a full list of the 2019 state sales tax holidays here, but some upcoming ones include:

  • August 18-24: Connecticut, clothing and footwear
  • August 17-18: Massachusetts, specific items costing less than $2,500 per item

Split bulk purchases

You can usually save money by buying certain items — like construction paper, pens, pencils and folders — in bulk, but you can save even more by splitting those bulk items with other families. Not only is this a great way to share savings, Woroch said, but you can earn rewards faster by charging everything on your card and then having the families pay you back.

Redeem your rewards

If you have a cash back credit card, now’s the time to use it. “Most credit cards give you the best redemption value when you opt for statement credit or have the cash rewards deposited into your bank,” Woroch said. “You can set this money aside for back-to-school shopping.”

Alternatively, Woroch suggested checking to see if your particular card allows you to redeem points for gift cards to retailers where you plan to shop.

Use discounted gift cards

Besides redeeming credit card points for retailer gift cards, you can also scour the web for cheap gift cards online. Planning a trip to Target? Scan websites like Raise, Cardpool and CardCash first. These sites buy and sell unused gift cards at a discount, meaning you can save on purchases you were planning to make anyway.

Consider having your kids contribute

Depending on your child’s age, back-to-school shopping might be the perfect time to start having them contribute to their own goods, especially if they earn an allowance or have a job. Talking to your kids about money at a young age — whether about budgeting, saving or spending — will help them develop solid money habits that will pay off in the future.

Parents already seem to be catching on to this idea. “It was surprising to see how much of their own money kids are contributing towards the back-to-school bills,” Mathews said. “Teens and pre-teens will be spending $63 of their own money, which works out to $1.5 billion overall. This is significantly higher than the levels we saw a decade ago.”

Although the news about increased spending on back-to-school supplies may be alarming, these days there are more ways than ever to save. A little ingenuity, resourcefulness and research can go a long way.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cheryl Lock
Cheryl Lock |

Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at [email protected]

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Survey: Most Americans Have Raided Their Retirement Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Successfully saving for retirement requires dedication and self-restraint, but more than half the country admits to robbing their future selves in order to satisfy today’s spending needs, according to a new survey by MagnifyMoney. While the economic pressures bearing down on workers today make their actions understandable, the hard truth is that many Americans are turning an already-difficult task that much harder by tapping into their retirement savings early.

Key Findings

  • Approximately 52% of respondents admit to tapping their retirement savings account early for a purpose other than retiring: 23% have done so to pay off debt, 17% for a down payment on a home, 11% for college tuition, 9% for medical expenses, and 3% for some other reason.
  • About 29% say there are some scenarios where it is a good idea to withdraw money early from a retirement savings account.
  • Around 60% of respondents do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea, and 15% have no clue.
  • Almost 25% are unhappy with their retirement savings. 47% are happy with the amount saved, and about 28% are neither happy nor unhappy.
  • Finally, 27% have never thought about how much money they’ll need in retirement.

Why are Americans tapping their retirement savings early?

The two main reasons respondents cited for withdrawing money from their retirement savings are as American as apple pie: home ownership and personal debt. According to the survey, 23% of those making an early withdrawal did so to help pay down non-medical debt, while 17% needed the money for a down payment on a home.

Although the housing market appears to be cooling off compared to just a few years ago, a down payment on a home still requires a significant chunk of change — experts recommend a down payment equaling 20% of the total mortgage to optimize your mortgage payments.

Personal debt, from credit cards to student loans, remains a fixture of everyday economic reality for millions of Americans. In other words, the stressors that cause workers to raid their retirement funds don’t look like they will decrease appreciably in the foreseeable future.

Which Americans are withdrawing money the most?

Breaking down the demographics, older savers are less likely to withdraw money from their retirement fund than younger savers. 54% of millennial savers say they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers and 43% of baby boomers. This stands to reason considering that many millennials have now entered the stage of life where they are getting mortgages, starting families and taking on bigger financial obligations while also being decades away from the traditional retirement age. Millennials are also more likely to say that raiding your retirement fund is justified under certain circumstances, as seen in the chart below:

Just one of many bad retirement savings habits

Tapping into retirement funds — whether an employer-sponsored 401(k) or a traditional IRA — before the appropriate age almost always comes with a financial penalty in the form of additional taxes and fees. What is more, you’re diminishing the principle that fuels the compound interest you need to meet your retirement savings goals.

Unfortunately the survey reveals early withdrawals are just one of the many bad habits Americans engage in when it comes to retirement savings. This list of less-than-ideal practices includes:

  • 35% of Americans are not currently saving for retirement. Of those who are, 37% started saving at age 30 or above, and 12% started saving when they were older than 40.
  • 60% of Americans do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea and 15% have no clue.
  • Nearly 1 in 5 Americans don’t contribute enough to their employer-sponsored retirement account to get the maximum company match. Maximizing a company match is one of  your best ways to maximize your retirement savings. Among those with an employer-sponsored retirement savings plan, just 17% of respondents contribute 10% or more of their take-home pay. Almost 5% contribute nothing at all, and nearly 6% are unclear about how much they contribute.

  • Approximately 42% of respondents have made the mistake of withdrawing their entire balance from an employer-sponsored retirement plan when changing jobs without rolling it over – and nearly 15% have done so more than once. A little more than 47% of millennials admit to this faux pas.

The most damning finding of all is that 27% of those surveyed have never thought about how much they’ll need in retirement. And while “ignorance is bliss” may hold true when it comes to some things in life, this expression should not apply to your retirement plans.

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,029 Americans, with the sample base proportioned to represent the general population. The survey was fielded June 24-27, 2019.

Generations are defined as:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby boomers are ages 54-72

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here