How to Get Out of Debt: The Ultimate Guide

Why Get Out of Debt

In American society, debt is widely accepted as normal with many people willing to bury themselves in it for instant gratification. The gratification is short lived as we stress about how to pay back our debts and are forced to stay at jobs we hate just to make payments.

Debt increases stress and reduces our freedoms. While booking a week-long vacation in Hawaii and charging it to your credit card feels like freedom, it’s really a trap. How many hours of work will you have to put in to pay that off? How much interest will you accrue? In the end, is that debt worth the short-term experience?

Many people are finding the social norms of debt aren’t conducive to being truly happy. They are seeking ways to get out of debt and some are finding early retirement becomes a realistic option. Reduced stress and true freedom are a couple great reasons to get out of debt.

Get Out of Debt:  Step 1. Commit

It may seem obvious that if you want to get out of debt you need to commit to it. I must mention this because commitment is one of those things that is easier said than done. 

There will come times when you will have to practice saying ‘no’. Coworkers may encourage you to hit up the gastropub across the street for lunch. You already brown-bagged your lunch but could really go for their signature burger. If spending extra money eating out doesn’t align with your debt repayment goals you will have to bow out. In these small moments, you either sacrifice your long-term goals or you stay strong. Unfortunately, all too often we tell ourselves ‘just this once’ or ‘I will start over tomorrow’ and then tomorrow never comes. 

A slip-up here and there is normal, but it will take consistent commitment to reach the finish line. 

Get Out of Debt:  Step 2. List Your Debts

The next step you need to take is listing all of your debts. Include any money that you have borrowed from friends and family. You will have to determine a total amount owed to every company and person in your life.

As you are figuring out who you owe also jot down the total amount owed, interest rate, and minimum payment due each month. Keeping this information in an Excel spreadsheet or Google sheets will allow you to edit if and when needed.

At this point, you will have a concrete number and see what your debt picture looks like. This stage can be rather scary especially if you had no previous knowledge of how much you owed. It may come as a huge shock. Don’t be dismayed though. The following steps will give you the tools you need to tackle that looming debt.

Get Out of Debt:  Step 3. Make Balance Transfers

To avoid increasing your debt as you are trying to get out from under it consider balance transfers. If you have a credit card with a high-interest rate try transferring the balance to a lower rate or 0% credit card.

A few places to look to transfer your balance to are Bankrate, Credit Karma, and Nerd Wallet.

Once you determine if you qualify for a balance transfer you will need to see if transferring is still a good idea. You want to make sure you are still saving money after you consider the transfer fee and the length of the 0% offer. Typically, the fine print outlines how long you are able to carry that balance at the low rate. If you are not able to repay the balance in the time allotted you may want to reconsider transferring.

If you find you don’t qualify for a transfer or decide it’s not a great idea, you could try calling your card company to negotiate a lower interest rate. The Simple Dollar has a guide to help you negotiate those rates.

Do you have a mortgage? You could look into refinancing your existing mortgage for a lower interest rate. 

If your student loans are the biggest burden you carry you could also look into refinancing those. When it comes to your student loans you will need to do your due diligence.  Refinancing them isn’t as straight-forward as your mortgage. There are different considerations to keep in mind. If your loans are federally financed they come with a bit more flexibility and the option for deferment. That perk may not be something you want to give up if money is tight. Make sure to research your options and choose what is best for your lifestyle.

 

Get Out of Debt:  Step 4. Choose a Repayment Plan

When it comes to getting out of debt there are two popular plans. The Snowball method, made famous by Dave Ramsey, and the Avalanche method work very well. In choosing which plan to use, you will need to take a look at your lifestyle and your long-term goals. 

The Snowball method may be for you if you are motivated by quick wins. This method focuses on tackling smaller debts first to give you a quick sense of accomplishment in paying off a bill right away. This can help bolster momentum to keep you on the journey. 

The Avalanche method focuses on paying off high-interest debt first. This method has the potential to save you a lot of money over time on interest. So if you are okay with your debt repayment taking a little longer while saving money you may want to consider the Avalanche method. 

Get Out of Debt:  Step 5. Track Your Spending

Tracking your spending is so important to get out of debt. Getting out of debt is hard enough as it is and there is no need to make it harder by letting money fly out of your wallet and end each month wondering where it all went. 

When you are diligent about tracking your spending you will have an honest review of how you handle your money. If you find you spend an astronomical amount each month on clothing you have the power to cut back and apply the savings to your debt. If you never track your spending you will never determine where the money is leaking out. 

There are apps like Mint and Personal Capital available to help you track spending so you aren’t required to hoard receipts and tally everything up at the end of the month. You are able to link your bank accounts to the app and set budget categories with limits. Once you reach the spending limit you will receive a notification. When you are just starting out you may not know what limits to set. That is okay. You may want to just track your spending the first month and analyze which area you could spend less in. You can let more about spending cuts in the Money Saving Guide. 

Get Out of Debt:  Step 6. Work Your Plan

The best-laid plans are useless until they are put to work. Now that you know your amount of debt and have chosen the repayment plan that’s best for you it’s time to start. Make sure you are keeping your spending on track and applying extra funds to your debt. No matter which plan you chose you will need to make sure you are putting the extra money from paid off debts towards the next debt. If you fail to do this the plan will fail and you will carry your debt longer.

Get Out of Debt:  Step 7. Monitor & Adjust

Assuming you already have a budget (if not set one up here), your budget likely won’t work perfectly the first few attempts. This is the natural process of creating a working budget. You may find that you will need to make adjustments with a spending category you hadn’t considered earlier or perhaps you restricted yourself too much and need to add in ‘fun money’.

If you found you have more money than expected to throw at your debt go ahead and recalculate your estimated pay off date and celebrate that you are that much closer to your goal.

Life changes and your budget will need to adapt to it. Don’t beat yourself up if your budget doesn’t always perfectly align with the changes.

Get Out of Debt:  Step 8. Earn More

Depending on how ambitious you are or the amount of extra time you have, you may want to look into earning extra income. More income may not need to come from a second job or side hustle if you are will to negotiate a pay raise with your boss. If a side hustle is an option there are various type of traditional gigs as well as those you can do from home.