How to Get Out of Debt: The Essential Guide
Being in debt is stressful for anyone. If you want to learn how to get out of debt fast, then this guide will reveal tips for getting out of debt.
The statistics show eight in ten Americans are in debt. Do you fall into this category?
The good news is, you don’t have to stay in debt. Because you’re not alone in this, there are many tools available to help you pay off your debts.
We understand how difficult it might be to get out of debt. Don’t be embarrassed if you overused your credit card to splurge on fancy stuff once or twice.
To prove you’re not alone in this we put together a complete how to get out of debt guide.
1. Stop Using Credit
If it was that easy, you wouldn’t be in debt, to begin with. But now that you’ve decided to find out how to get out of debt, the first step is to stop depending on credit.
Gather all of your credit cards and get them out of your wallet. Many people literally freeze their cards by putting them in the freezer, but you might find this measure is too extreme.
You can simply hide your credit cards in a drawer or a box and toss it in the back of your closet. Ask a friend or a family member if they could keep them safe.
Getting rid of your credit cards is only the first step to stop using credit. You also need to stop relying on credit to make large purchases.
Commit to only use cash for anything you need to buy. If you can’t afford it, you might have to wait a little bit to buy it.
Start asking yourself if you need something or want something. If you’re thinking about buying a new couch, decide whether your current one will last you a bit longer.
If going out for an evening with your friends will mean swiping your credit card, maybe you can suggest a night in, or cut on another expense.
Once you stop using credit, you’ll slowly find the balance.
2. List All Your Debts
Once you stop using credit cards and other financing institutions, you need to figure out how much you owe.
Gather all of your documents, finance contracts, automobile leases, mortgages, credit card statements, and other applicable debts.
In a piece of paper, or if you want to be really organized, or a spreadsheet list all of your debts. The list should include the most up to date total balance. Also, write the APRs, minimum payments, and due dates for all the accounts.
You probably wanted to avoid this step, but it’s important to know how much you owe so you know how to get out of debt.
That total number will decide the measures necessary for you to walk out debt-free.
3. Avalanche Your Debt
When you begin your debt repaying plan, you can do it one of two popular ways, and debt avalanche is one of them.
Debt avalanche allows you to get out of debt faster paying the least amount of interest by targeting the account with the highest interest first.
Take a look at the list of debts and single out the credit card or loan with the highest interest rate. On the accounts with the lowest interest rates, you’ll devote your money to only making minimum payments.
Any extra money left over, you will use towards paying the highest interest credit card.
For example, in total, your budget to pay back your debts totals $1000 a month. Your highest interest credit card requires a minimum monthly payment of $200 and the APR is 24.99%.
All of your other debts and minimum payments for the lower interest accounts total $650 a month. Those amounts free you an extra $150 a month.
In order for the debt avalanche to work, you should take the extra $150 and add them to the $200 minimum payment. You’ll be paying $350 to start with to your highest interest credit card.
When that card is paid off, you will take the $350 and add it to the minimum of the next card with the highest interest and so on. The avalanche process continues until everything is paid off.
4. Snowball Your Debt
The debt snowball method is the opposite of the avalanche. Just like the name calls, you will start by paying the small debts and working your way up to the higher ones.
Unlike the avalanche method, the snowball debt repayment doesn’t focus on the interest rates. Look at your list of debts and organize it from lowest balance to the highest.
Some people prefer the snowball method because they get to see a dent in their debt sooner. The only downside is that they might end up paying more money on interest.
Are you wondering how to get out of debt using the snowball effect? Let’s say you have 4 sources of debt.
Your first source of debt is a credit card with a balance of $2000 and a minimum payment of $55 a month. Two other credit cards with balances of $600 ($25 a month), and $1,000 ($35 a month). Also, a car loan of $10,000 with a $340 a month monthly payment.
The total monthly payments for those 4 debts equals $455 a month. Once you work out a budget, you decide you can pay $700 a month toward your debts.
In this case, you will take your lowest minimum payment of $25 ($600 balance) and add the remaining $245 balance in your budget and put it towards that debt for a total of $270 a month.
Once the lowest credit card balance is paid, take the $270 and add it to the next smallest debt.
5. Negotiate Lower Interest Rates
A reason why your debt doesn’t seem to go down, it could be because of the highest interest rates taking most of your hard earned money.
Sometimes when you’re making minimum payments you’re barely paying enough to cover the interest. Minimum payments and interest rates are a vicious cycle that doesn’t let you get out of debt.
If you have always made your payments on time and have been a great customer, there’s no reason why you can’t try to negotiate your interest rates.
It’s always recommended that you try to lower your interest rates on the credit cards you already have. How to get out of debt by lowering your interest? Pick up the phone and start calling your creditors.
In the credit world, loyalty matters, so call up your oldest credit card company and try to negotiate.
Make sure you do your research and sound prepared when you talk to them on the phone. You will need to give them a reason why you need your interest lowered.
When you ask, always remember to be persistent and be polite.
6. Sell Your Extra Stuff
Do you know how to get out of debt faster? You could sell the stuff that got you in to dent in the first place.
If buying expensive clothes and bags racked up your credit card bill, why not trying to get some of that money back. There are many places where you can sell your used clothes for cash.
You probably don’t know it yet, but your house could be a potential gold mine.
Begin by performing an inventory of household items, electronics, shoes, accessories, furniture, etc.
Figure out creative ways to sell it. Whatever is most valuable you could take to a pawn store, sell yourself online, or have a yard sale for the low ticket items.
All of the money that you make selling your stuff, throw it into paying some of your debt.
7. Get Another Source of Income
How to get out of debt when you don’t have room to pay extra? It’s scary when you only have enough money to make your minimum payments on all of your debts.
If you’re struggling to pay back and make minimum payments, then it’s time you get another source of income. This might seem impossible if you already have a demanding job, but it doesn’t have to be miserable.
Remember this is side money and your livelihood won’t depend on it. You could babysit, dog walk, rideshare. Maybe you have a special skill you can use to make money such as tutoring in another language.
This could be the time to start a low-risk side business to pay for your debt. If you make it fun you won’t even know you’re trying to pay off your debt?
Also, consider your current job, when was the last time you got a raise. If you’re a deserving hard-working employee, there might be extra money you could earn.
8. Set A Budget And Stick to It
How can you get out of debt when there’s so much you want to do? You might be worried about becoming a recluse or a homebody if you stick to a tight budget.
It’s possible to pay off your debt and still have a little bit of fun, but you must make a budget.
When you budget, it will help you single out your wants vs your needs. The latte you get every morning could keep you from getting out of debt faster. We’re not saying to cut lattes out completely, but maybe reduce how many you buy a week.
Since you made a list of all your debts, you should also make a list of all your bills and how much you spend a month on them.
In your list of bills, you will see items you absolutely cannot cut, such as rent, car and health insurance, and electricity. You also have a list of optional lifestyle expenses such as cellphone, cable, internet, wifi, Spotify, etc.
How to get out of debt without completely destroying your lifestyle?
Call your service providers and negotiate your bills. Some companies will let you bundle cellphone, internet, and cable and give you a discount for doing so.
Also, are you paying for unnecessary services? Do you need all those channels when you mostly stream Netflix?
Question all of the services you pay for when you’re making a new budget and chances are you will find lots of extra change under the cushion.
9. Emergency Fund
How to get out of debt and save for a rainy day? It might seem impossible to save money and pay off your debt, but you need an emergency fund.
It’s important to get your emergency fund ready when you’re trying to pay off your debt because you won’t be relying on credit cards.
The amount you should have saved in your emergency fund depends on your needs and how big of a household you have. Some larger families might need an emergency fund of $3,000 to $4,000.
Rule of thumb is you should have at least $1,000 in saved in your emergency fund. Start your emergency fund as soon as possible. It might be difficult at first, but once you get in the habit it will become second nature.
How to get out of debt and build an emergency fund you might ask?
The answer can be found in your budgeting. Let’s say you budget $200 a month for entertainment but you decide to stay in 1 weekend and only spend $120. The extra $80 can go into your emergency fund.
When we say emergency, we don’t mean saving up for expensive clothes or electronics. We’re talking about emergency car repairs, medical bills, etc.
10. Stay Positive
If all of your debt has been keeping you up at night for so long, it might be difficult to stay positive.
How to get out of debt and stay positive? It might be easier than you think to have positive thoughts. Let the dream of finding yourself out of debt fuel you.
For starters, you already made the commitment to get out. When you begin to see your balances lower it will give you the motivation to keep going.
Also, don’t deprive yourself too much. Allow yourself to get the things that make you happy every once in a while.
How to Get Out of Debt–Final Thoughts
Don’t let debt keep you awake another night. Use these steps as starters and begin the journey into your debt-free life.