For some people, debt is just a way of life and they are happy with paying more for things if that means they can have it now. For others, it is a huge emotional burden.
According to Debt In America: Statistics and Demographics, the average American carries nearly $20,000 in non-mortgage debt.
- 18-29-year-olds: $69 billion total, $12,871 average
- 30-39-year-olds: $1.17 trillion, $26,532 average
- 40-49-year-olds: $1.13 trillion $27,838 average
- 50-59-year-olds: $98 billion, $23,719 average
- 60-69-year-olds: $64 billion, $16,661 average
- 70 and older: $36 billion $9,827 average
If you’re like me, debt can feel like a heavy burden that stands between you and the financial life that you dream about. If you’re ready to make a change and ditch the debt, here’s a step-by-step guide on how to get out of debt.
1. Where Are You At: Just like any journey, you need to know where you are and where you are going. Create a list of all your debts, including credit card balances, loans, and money you borrowed from anyone for anything. This will give you a clear picture of the amount you owe and help you prioritize your payments. You can use the page provided in the Spending Plan Worksheets.
2. Emergency fund: Unexpected expenses can throw a wrench into your debt repayment plan. Have an emergency fund to cover surprise costs without throwing off your debt payoff progress. Having a safety net prevents you from relying on credit cards or loans in times of crisis. Learn more about how to build an emergency fund here:
3. Stop digging: Before you can get out of a hole you’ve dug yourself into, you have to stop digging! Take your credit cards out of your wallet and put them in a safe so you are not tempted to use them. Use cash or your debit card for your expenses to break the credit card habit.
4. Assess Your Spending: Take a deep dive into your spending habits. Create a spending plan that outlines your monthly income and expenses. Look for areas where you can cut back, such as eating out, entertainment, or impulse shopping (aka. Those water and sand expenses). Redirect the money you save towards your debt repayment plan.
5. Choose Your Method: Decide on a repayment strategy that fits your personality best. You can choose between the debt avalanche method, where you focus on high-interest debts first, or the “debt snowball” method, where you pay off the smallest debts first for a quicker win and psychological boost.
For example, if you have a $800 credit card, a $500 credit card, and a $15,000 car loan, you would tackle the $500 debt first since it’s the smallest amount.
Yet, not all debts are created equal. The “debt avalanche” method helps you tackle the most expensive debts first and saves you money on interest payments over time.
Back to our example, if your $800 credit card has a 29% interest rate, the $500 card has a 23% interest rate and the $15,000 car loan has a 7% interest rate, you would pay off the $800 card first, then the $500 and the car loan last.
6. Negotiate with Creditors: If you’re struggling to meet your payments, consider reaching out to your creditors. Explain your situation and ask about options for lower interest rates or revised repayment plans. Many creditors are willing to work with you to find a solution that benefits both parties.
7. Increase Your Income: Finding ways to increase your income can speed up your debt repayment journey. Consider taking up a part-time job, doing something like food delivery, or selling items you no longer need. The additional cash can be directly channeled towards paying off your debts (and feels really good to see those balances drop faster)!
8. Celebrate Milestones: The journey to becoming debt-free can be long and challenging at times. Celebrate small victories along the way to stay motivated. If you like visuals, find a debt payoff chart that you like. Here is one I used when I was paying off my debts. I kept this on my refrigerator so that I would see it often and stay motivated.
Remember, getting out of debt requires determination, patience, and consistent effort. It’s a journey that might take time, but the sense of relief and accomplishment you’ll experience will be well worth the sacrifice. Trust me.