Best Ways for Millennials to Pay Off Debt

Three flatmates throw bills in the air

If you were born between the years of 1981 and 1996, you're officially a millennial. And if you're like many of your contemporaries, you're hanging on to some significant debt. In fact, individuals in this in age bracket hold an average of $80,666 in total debt, according to Experian data. That's a big burden to drag around. If you're among the overly obligated, it's time to shift into a positive net worth. Here is a debt payoff plan that can help you get you back on track.

Know Who You Owe

You may think you know who all of your creditors are, but to be sure, check your credit report. It will list all of your tradelines, from loans to credit cards. Collection agency accounts will show up too, and this is where you may be surprised. Some debts can fall through the cracks. For example, you might have had a dentist bill that you forgot about and it was sold to a collection agency. If the sum was small, the collector may not have even contacted you, but is still sending information about it to the credit reporting agencies. Take a deep breath and find out what's in your file.

Also review your most recent account statements to get your current balances. Starting with a knowledge of where your various forms of credit stand will help you attack your debt more efficiently.

Understand Your Cash Flow

The word "budget" can be depressing, so think of it as "cash flow" because that's really what it's all about: the amount of money you have coming in and going out.

List all of your monthly expenses such as rent, utilities, phone, gas, groceries and the like, tally them up, then subtract the total from your monthly net income. Whatever you have left over is what you should commit to your debt. If that number is insufficient, consider ways to hike it up:

  • Reduce expenses. What can you live without or cut back? It might be possible to bundle your cable and internet for significant savings, eliminate a daily coffee purchase, or cancel a gym membership and do at-home workouts instead. It's up to you to identify areas in your cash flow that you can change so you will be in a better position to deal with your debt.
  • Increase income. If you're already living close to the bone, focus on bringing more money into your life. Drive for a ride-sharing company on the weekends, tutor neighborhood kids in Spanish, take the early morning shift at a cafe. Stretch yourself.

Have a payment goal in mind. Maybe you have $500 that can go toward your debt now, but you want to double it. Great. Figure out how you will add another $500 to your payoff plan. If you can reduce expenses and increase income simultaneously, you'll get ahead faster.

Prioritize Your Debts and Power Them Down

One strategy for paying off debt is to list your credit card and loan accounts by their interest rates, with the highest rate at the top. For example, let's say you have $1,000 to commit to debt payoff, and these are your accounts:

AccountBalanceInterest RateMinimum paymentPower payment
Credit card 1$2,00029%$60$350
Credit card 2$5,00021.99%$150$150
Personal loan$3,00012%$150$150
Student loan$20,0006.2%$350$350
Total $30,000 Total $710Total $1,000

Send the maximum amount to the account at the top of your list and the minimum to the others. Once the first reaches a zero balance, apply its payment to the next account on your list. In the scenario above, the balance on credit card 1 would be eliminated in seven months. Then you'd add its payment to credit card 2, sending $500 instead of $150. When that's done, the personal loan will get $650 until it's deleted. Eventually you'll send the entire $1,000 to your student loan until it, too, is paid off. It's a simple and efficient system—as long as you don't start charging on your credit cards again once they're paid off.

But what about the debts in collection? Unsatisfied collection accounts look bad on your credit reports and negatively impact credit scores because they're a clear indication that you didn't pay your bills. It's best to pay all these accounts in full, as soon as you can. A possible exception: If the accounts are nearly 7 years old, they will soon be deleted from your credit report. While some people just wait until those accounts drop off their file, just be aware that the statute of limitations for being sued can extend past that time frame, depending on the state you live in. Check with your state attorney general's office to learn the laws for your area.

Track With Technology

There are a multitude of excellent personal finance apps that you can upload to your phone or tablet, and most are free. These tools can help you design a personalized cash flow plan, track daily spending, manage your checking and savings accounts, and keep you up to date with your debt deletion goals.

Select the app you want and enter your information. Soon you'll get notices if you're spending more than you usually do, you'll get pinged when bills are due, and you'll receive alerts if suspicious activity on your accounts is detected. Many also offer customized money and credit tips.

If you'd rather not use an app, you can still do pretty much everything with your phone. You're probably relying on this technology anyway. According to a Jumio and Javelin Strategy & Research study, 47 percent of millennials have adopted mobile banking. Still, it requires dedication. The study found that a common reason millennials abandon mobile banking is that the process takes too long and remembering all the passwords is a pain. Don't be deterred! Wake up in the morning, check your balances, then plan your financial day. The more you know, the more in control of your money you will be.

Lastly, make a point to use credit products in constructive ways. They should enhance your life, not cause you stress or cost too much money. The simple strategy is to spend with your credit cards, but pay on time and in full every month so you don't carry over balances. Take out loans only when necessary and when you're certain you can handle the payments. Be that millennial who bucks the big-debt trend and proves to past and future generations that you're no slacker.