Are you swimming in debt? Here’s a four-step strategy to pay it off (2024)

From student loans to credit cards, mortgages and auto loans, Americans are saddled with more debt than ever before. According to the Federal Reserve Bank of New York, total household debt reached a new peak in the first quarter of 2018 to $13.21 trillion.

While getting out from under a mountain of debt is difficult, Garrett Gunderson, chief wealth architect at Wealth Factory says it’s not impossible. He shared his four-step strategy.

Build your savings first

Trying to make higher payments in order to reduce your debt is admirable, but it doesn’t make sense if you don’t have enough money tucked away in a rainy day fund. A January survey by Bankrate found that most Americans don’t have enough savings to cover a $1,000 emergency.

Start your savings plan by creating a bank account that’s separate from your checking account. Gunderson calls it the “wealth capture account.” Have a specific amount of money automatically deposited into the account on a regular basis. Save at least three months of your income; six months if you can manage it.

He says after you build your wealth capture account, go one step further and create a “living wealthy account.” Use those funds for when you want to splurge or buy something extravagant. Put a percentage of your paycheck regularly into that account, just as you’re doing for your wealth capture account.

“If we go on a budget or diet where we never enjoy life, usually people will fall off a cliff,” Gunderson says.

Restructure loans

If you’re living paycheck to paycheck, you know how tough it is finding money to save. Gunderson says you can minimize your monthly bills and maximize your cash flow by restructuring your loans. He suggests implementing his “four c” plan:

• Credit: Getting your credit score above 780 is the first step. You can do that by paying your bills on time, limiting the number of hard inquiries into your credit and fixing errors. Once you boost your credit score, lenders will be open to discussing refinancing options with you.
• Collateral: Take a close look at your collateral. Do you have a car loan? If you have good credit, you may be able to get a rate as low at 1.9%. Refinancing your mortgage may also be an option. You can use the extra money to pay off a double-digit interest rate credit card.
• Cash flow reporting: Gunderson says a lot of people don’t have their finances organized. When trying to refinance a loan, if you present your information in a disjointed way, you run the risk of being hit with a higher interest rate.
• Connections: Most consumers take what they get from lenders without doing the research. Lenders operate differently and one company may offer you a more favorable deal. He also stresses that all loans are negotiable. If you have good credit and pay your bills on time, you can negotiate a lower interest rate on your credit card.

Attack one loan at a time

Most experts advise consumers to pay off loans with the highest interest rate first. Gunderson feels differently. He suggests consumers use the “Cash Flow Index” – a technique developed by him and his team. Take the balance of any loan and divide it by the minimum monthly payment. If the number is less than 50, the loan is eating up a lot of your cash flow because it requires a high payment. If the number is over 100, it’s a more efficient loan. His advice is to attack one loan at a time and only pay extra on the loans with the lowest cash flow index. Once you pay that off, you can then attack the next lowest cash flow index loan. Improving your cash flow will boost your debt to income ratio and make you more attractive to lenders.

Be cautious locking in money in an asset

Gunderson says it’s dangerous to invest when you have debt that is keeping you up at night, putting your family at risk or that’s costing you massive amounts of money. Paying extra on your mortgage can make sense when you’re financially stable, but other times it’s just locking your money into a hard-to-access equity. Do you have a credit card with a high-interest rate? While saving is important, he says if you have a lower interest performing investment such as a certificate of deposit, sometimes it’s better to cash it in to pay off debt rather than leave the money where it is.

“Money is so accessible and available,” says Gunderson. “People have created a massive amount of debt because we’ve become a society that’s not about the cost of the purchase, but the payment behind the purchase. People look at what they might be able to afford based on the payment not taking into account any mishaps, emergencies or other issues that may happen along the way.”

Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content. You can follow her on Twitter @lindanbell.