Figuring out how to get out of debt is one of the most freeing things any person can do with their finances. The problem is that so many people do not see how to make their dream of a debt free life a reality.
According to a 2015 Nerdwallet study on American debt, the average American household was more than $130,000 in the hole last year.
Amazingly, $15,762 of that amount was comprised of credit card debt – the worst kind of debt anyone can have.
Of course, other types of debt can hurt our finances, too. Collectively, Americans owed $1.06 trillion on auto loans, $1.23 trillion in student loans, and $8.25 trillion on mortgages in 2015.
Some of this debt was planned for and is still considered “good debt,” it still takes a toll on our finances – and our lives.
6 Tips for getting out of debt:
But, how did it get this way?
Sadly, we are programmed to take on and accept debt from the moment we are born. Starting from childhood, we are tempted with a barrage of television ads for cars, boats, and luxury items we can easily finance through any number financial products and loans.
“Twelve months – same as cash” is a phrase we all heard repeatedly growing up.
Can’t afford something? Hey, that’s okay. Just keep up with your loan and you’ll be fine.
Visit a car dealership and the first question you’re asked is how much you can afford to pay each month – not what you can afford to pay over all. And the same is true nearly anything you can buy – from clothing to furniture.
Can’t afford it today?
Just open a store credit card and you can pay it off later, they’ll say. Want to go to college? Just sign on the dotted line and you can borrow the money you need. You might have to pay it back for ten, twenty, or even thirty years, but it will all be worth it, right?
How to Get Out of Debt
If you’re struggling to make ends meet or hoping for a life with less stress and worry, you need to learn how to see debt in a brand new way.
Instead of seeing debt and credit cards as the easiest way to afford what you want, you should start seeing debt for what it really is – a curse that stands between you and your lifelong goals.
There are numerous ways to get out of debt, and not everyone needs to choose the same path. For some people, a slow and steady pace will work just fine. But for others, the desire to get out of debt is so great that they will do anything to speed the process along.
The very first step anyone should take is to sit down with all of their bills and banks statements in order to figure out how much they owe, and to whom. Sometimes taking a comprehensive look at all of your debts is the easiest way to figure out where you should start.
And regardless, no matter what, the first step out is debt is coming to grips with exactly how much money you owe.
You may not like what you see, but you’ll have to deal with it either way. Once you have confronted your debts, there are several strategies you can use to dig yourself out:
Try the debt-snowball method.
The debt snowball method for debt repayment is often touted as the best and most efficient way to become debt-free. If you choose this option, you’ll start the process by listing all of your debts in order from the smallest balance to the largest.
Once your debt reduction spreadsheet is ready, you’ll create a budget that accounts for making minimum payments on all of your debts except for the smallest one. When it comes to your smallest loan balance, you’ll pay everything you can towards it until it’s gone.
As each small balance is paid off, you’ll move down the list, throwing all of your extra funds at the smallest balance and making minimum payments on the rest. Over time, your small balances will be wiped off the face of the Earth, leaving only your largest balances behind. Without forced payments on your small balances, however, you’ll be able to snowball your payments towards your remaining, larger loans and get rid of them at a much faster pace.
The biggest benefit of the debt snowball method is that you’ll get a lot of “small wins” early, and reduce the number of monthly payments you’re making at a much faster pace.
Take on the debt avalanche.
The debt avalanche works similarly to the debt snowball, but takes a slightly different approach. Instead of prioritizing your smallest balances first, you’ll list your loans and balances by their respective interest rates instead.
Each month, you’ll pay as much as you can towards your highest interest debt while making minimum payments on everything else. Over time, your high interest debts will be paid off, leaving only low interest debts. Month by month, you’ll continue attacking all of your balances until they are gone – and gone for good.
While you may pay on some loans longer with this method, using the debt repayment plan of paying off high interest debts first (instead of your smallest balances) will save you more money in the long run.
Pay off debt faster with a 0% APR credit card.
It can be difficult to accept the fact that a credit card might be the solution to credit card debt, but hear me out. In reality, certain types of credit cards, 0% APR and balance transfer credit cards, offer introductory offers that can help you save money and get out of debt.
With balance transfer credit cards, you’ll get 0% APR for anywhere from 12 – 21 months. If you transfer several or all of your high interest balances over – then use your introductory period to absolutely destroy your debts – you’ll save money on interest and become debt-free at a much faster pace. When you’re not forced to pay interest on your balances, every penny you pay goes directly towards the principal of your loan.
If you’re thinking a balance transfer might actually work for your financial situation, here are some details on one of the best balances transfer cards on the market today:
Discover it® – The Discover it® is another top balance transfer card that has taken the market by storm. With this card option, you’ll get 0% APR on transferred balances for a full 18 months. In addition, you’ll also earn 1 point for every dollar you spend on the card, along with 5 points per dollar spent on the first $1,500 you spend in categories that rotate every quarter. You can redeem your points for cash back or gift cards, and this card also comes without an annual fee. Read here to learn more about the Discover it®.
Consolidate or refinance your debts.
By refinancing certain loans, you may be able to get a better deal and save money in the process. With private student loans, for example, it can make sense to refinance with a different lender to get a loan with a lower interest rate and better terms.
If your current private student loans are charging higher interest rates than you believe you could get elsewhere, make sure to connect with SoFi or LendEDU. Here’s a review of SoFi if you want to learn more about how they can help.
You can also consolidate your high interest rate credit cards with a personal loan. Consolidating your debts can help you get on a structured payment plan to help you get out of debt faster. Debt consolidation loans are amortized over time (similar to a mortgage) and you’ll end up paying less interest versus paying minimum payments on your credit cards.
Both online student loan providers can help you determine whether you could, in fact, get a better deal with a debt consolidation loan and get that student loan debt out of your life much faster.
the mortgage on your home began before 2008, you may also be able to save money by refinancing your home at today’s low rates. While starting your loan over may extend your repayment timeline, having a lower monthly payment can free up cash to pay down other debts.
If you are able to refinance at a much lower interest rate, on the other hand, you might be able to get a fifteen-year mortgage for around the same monthly payment as your current, thirty-year loan. If that’s the case, you should at least consider that option to get out of debt faster.
By and large, the best option for your finances depends on how much debt you have, what kind of debt you feel comfortable carrying, and your individual goals.
If you are way behind on many debts and are unable to pay them off, you may be able settle your debts for a much smaller amount. To do this, you will need to have a lump sum payment that you can offer the lender. This works particularly well with old credit card and consumer debt.
You can also go through a debt settlement company, but you will pay more by using them.
With any type of debt settlement program make sure you get the agreement in writing and keep all receipts, so that no one can come back later and accuse you of not paying off the debt.
Drastically cut your expenses.
If you can’t seem to get ahead, you’re probably spending more money than you should most months. If that’s the case, it can pay off to drastically hack your monthly expenses to free up cash.
If you’re not sure where to start, get out your bank statements from prior months to figure out where your money has been going thus far. Are you spending a lot of money dining out at restaurants? Are your trips to the mall hurting your bottom line? Are your car payments killing your budget?
The easiest way to hack your spending plan is to start with the low-hanging fruit.
While you’re trying to pay down debt, stop dining out and start cooking at home. Quit destructive habits like smoking if you can – or at least cut down.
Take a close look at your grocery budget, too. If you’re spending a lot of money on food each month, focusing on cheap and easy meals for a while can help you cut back. Also, look at your “discretionary bills,” and consider cutting them out of your life. If you’re paying a lot for cable television, smartphones, entertainment, or subscriptions, it can pay off to cancel those services while you focus on paying off debt.
Just remember, any amounts you cut from your budget need to be thrown at your debts in whatever order you see fit. If you end up spending that money elsewhere in your budget, you aren’t really helping yourself.
Get a part-time job or pick up a side hustle.
Once you have figured out the best way to pay off your debts and cut your spending, the other way to speed up your journey is to pick up a side hustle or take on a part-time job. By earning income through additional labor – or through passive means – you can earn more cash you can use to pay down debt faster.
There are myriad ways to earn extra money if you look hard enough. Depending on your situation, you might be able to pick up more hours or even overtime at work. Or perhaps you can start a side job or hustle you can run from home. You can also look into becoming an Uber driver, which is a great side hustle because you can create your own schedule according to your flexibility and schedule.
Mow yards. Trim hedges. Start a small painting business from home. Pick up freelance writing and editing jobs. Babysit your neighbor’s kids or pets. Pick up overtime at your full-time job. Wash cars, run errands, or house sit.
If you’re creative enough, you’ll find there are plenty of ways to earn extra cash. And once you start earning, you’ll be able to accelerate your debt payoff.
Online Tools to Help you Get Out of Debt
These tools are all built to help you get started quickly. Their websites and smartphone apps are intuitive. All of them are free of charge so you don’t have to worry about adding to your debt in order to get out of debt. All four are proven to help their users.
Plainly put, all of these are great options. In fact the companies below all together would make an excellent debt payoff toolkit. Check them out and get going.
This debt payoff software is built with technology and ease of use in mind. ReadyForZero is built on three major points: Plan, Pay, and Track. (Okay, there is a fourth point, Relax, but the first three really count.)
The free software does just that. You input all of your debts, interest rates, payments, and accounts. The company helps you put together a plan to pay off that debt as quickly as possible.
Once you have the plan setup you don’t even have to leave the website to pay your bills. You can send payments to those specific creditors through ReadyForZero. That’s pretty slick.
One of the biggest motivators for individuals trying to get out of debt is seeing early success.
If you can see some early success like paying off a debt, you are much more likely to keep on with the plan. ReadyForZero helps you track your progress to stay motivated to keep pressing on.
Of course once you have paid off your debts you will finally be able to relax. And thankfully you won’t have to add to your debt to get access to this software: it is free of charge for the regular plan. (The company does offer a plan called ReadyForZero Plus, but you are under no obligation to upgrade. You can keep using the free version for your full debt payoff plan.)
If you have debt but have maintained a good credit score you may be able to expedite your payoff plan by getting better credit offers to move your debt to.
First, a word of warning. You will never pay off your debt if you don’t get serious about sending in extra principal payments each month. You can work more, cut back, or do both to get that extra money to pay down the debt faster. Moving your debt from one company to another can help, but you can’t play hot potato with your creditors and hope to get out of debt fast.
That having been said one of the best ways to cut your interest is to lower your interest rate. And that’s exactly what Credit Sesame does for you.
The company automatically pulls all of your credit, debt, and payment information from your credit history for no charge. They then use this data to compare to other offers with their credit partners in order to save you money.
For example, you might get a refinance offer for your mortgage and a balance transfer offer for one of your balances. Not only will these offers save you money, you will be able to plainly see through Credit Sesame exactly how much money you will save.
One last thing: you get access to a free credit report each month. This report isn’t your FICO score, but still holds some value as you track the ups and downs of your score.
Here are the differences:
- Credit Karma will update your credit score daily versus monthly for Credit Sesame. (You have to manually login and click update to get the daily score, but you can get it daily.)
- Credit Karma uses a different credit bureau score than Credit Sesame. However, they are similar in that they are both non-FICO scores.
- The company offers a Credit Report Card to help you understand why you are receiving a certain score. Is it too many recent credit inquiries or a error on your credit report? The Credit Report Card helps you with that.
A big part of your debt payoff plan is to avoid late payments that result in your interest rates being increased to astronomical levels. That’s where Finovera comes in to your suite of debt payoff tools.
Finovera is not specifically a tool designed to help you pay off your debts. It is a great piece of software that won’t cost you a thing and can help you avoid furthering your debt problems.
With Finovera you can connect all of your bills — namely utilities and credit cards — and the company stores your statements and reminds you of due dates as they come up. The target Manilla is trying to solve is two fold: tracking all of your statements online through a multitude of websites and logins is not easy, and having a late payment can be devastating but it is an easy mistake to make.
Being able to login to one website to see all of your bills and get reminders of all of your due dates solves both of these problems with one elegant solution.
If I Receive a Large Sum of Money Should I Put it All Toward Debt?
This is a great question for people who are just starting to pay off their debt and come into an inheritance or other windfall. What is important is that we set ourselves up for success not just paying off debt.
Make Sure You Have a Savings Cushion
The question involving windfalls, and particularly inheritances, is almost always between paying off debt or investing. I would suggest that there is a third option that can’t be overlooked in a lot of cases.
Before you either pay off debt or invest for the future, the first thing you need to do is to create a cash cushion for the present.
One of the biggest reasons for financial stress – and even for the inability to achieve long-term financial independence – is a lack of liquidity. The absence of any kind of liquid savings forces you to rely on debt any time there is a cash shortage.
It doesn’t take much imagination to realize that an absence of savings is a surefire recipe for a lifetime on the debt treadmill. Unfortunately, it starts early with most people. Because they never have a basic savings account, credit dependency becomes a lifestyle. Debt can suck the life out of your finances, because it represents a perpetual drain on your income.
In addition, having enough savings to cover your living expenses for a few months will do more to reduce financial stress in your life than just about any other single strategy. It eliminates worry over an unexpected expense, or even a temporary loss of a job.
For all of those reasons, my recommendation would be to first make sure that you have enough money in a savings account or money market fund to cover your living expenses or at least three months. That will give you the breathing room that need to do everything else.