As much as we all hate debt, most people have to admit that they have debt or have had it at one point in time. Credit cards, student loans, car notes, overdrafts, personal loans, mortgages, etc., are usually the big items in people's debt portfolios.
It's easy to get overwhelmed with so many bills to pay, but the good news is that with changed spending habits and re-prioritizing your finances, you can learn the best way to get out of debt and have peace of mind.
Below are steps that will hopefully assist you on your journey to becoming debt-free.
1. Get radical about paying off your debt
Make a mental commitment to get rid of your debt as soon as you possibly can; think of it as a "critical" matter - you need it out of your life fast, and under no circumstance should you apply for any new credit cards.
It's all about working on your mindset, and you can do this by surrounding yourself with people and things that will keep you focused and motivated, even on difficult days.
Read books, watch videos (there's a ton of great ones on YouTube), listen to podcasts, etc. Your goal is to keep your head in the game. Getting the right money mindset is foundational to getting out of debt.
Taking this step will also help to eliminate any debt stress you might be feeling.
2. Write everything you owe down
Visual representation of what you owe is the most crucial step. This will give you an overview of all your debt in one place.
Gather all your credit card statements, overdraft and loan statements, etc., and write down the amount you owe for each one of these items along with their associated interest rate. At this point, it's also important to differentiate between good debt and bad debt.
An example of good debt is a mortgage. A home is an asset that could appreciate in value over the long term despite the real estate market's ups and downs. At the very least, if you pay off your mortgage, you'll end up owning your home outright.
An example of bad debt is your credit card; this is a liability. You've spent the money and it's gone. However, you are left paying high interest on an item that's probably not doing anything for you.
Keep in mind, though, that debt is still debt; you are just prioritizing by moving the good debt to the bottom of your pay-off list and putting the bad debt at the top of that list.
3. Get on a budget
The key to staying on top of your finances and actually getting to financial success is to live within a budget. This is definitely foundational to achieving your financial goals.
A lot of people hate the word budget, but it will keep you in check by helping you monitor your spending.
There are many great tools for creating an automated budget. However, a simple excel sheet will suffice. Budgeting your money is essential and the best way to get rid of debt.
3. Put your list of debts where you can see it daily
There's nothing like a jolt back to reality when you are getting ready to go out and buy the latest platform shoes, and you have your debt staring back right in your face on your bathroom mirror. Or have it on your phone screensaver that you'll see each time you need to make a call or reply to a text.
Having your debt listed in a place where you can see it every day will keep your mind on track. You can also make a financial vision board to help you attain your desire to become debt-free.
4. Cut up those credit cards
So now you have your list written and posted in a place you'll see it all the time. Why are those credit cards still in your wallet? You don't need them.
If you can't bear cutting them up, put them in a plastic bag, fill it up with water and put that bag in the freezer until you've paid each one of them off, never to be used again.
5. Start paying off your debt
The next and most important step is that you commit to paying off your debt - this goes back to getting radical! Grab that list of yours and start paying off your debts - check out the snowball method.
This is where you pay off the debt with the smallest balance first, putting as much as you can towards it in excess of your minimum payments.
You'd pay the minimum to all your other debts until the smallest debt is paid off. Once that's done, you'd repeat the process with the next smallest debt.
It's very important that you pay more than the minimum payments each month as minimum payments usually only cover the interest you owe and little or no principal. Your goal should be to pay as much as is feasibly possible to get rid of your debt ASAP.
6. Create an emergency fund
A lot of people think debt should be paid off before any savings begins because you might as well use that money you are saving to pay off your high-interest credit cards, but I disagree.
I firmly believe that as you pay off your debt, you should also start building a small emergency fund.
Start with $50 to $100 dollars a paycheck until you get to $1,000 so that if something comes up, instead of turning to a credit card and increasing what you owe all over again, you can turn to your savings to deal with your emergency.
7. Consolidate your debt
If you are paying high-interest, you may want to consider consolidating your debt into a lower interest rate loan. You can save hundreds to thousands of dollars in interest if you consolidate your debt the right way.
For instance, if you have a balance of $5,000 on your credit card and your interest is 24%, you will pay roughly $2,645 in just interest!
If you get a personal loan with a 10% interest rate, this cuts your interest amount to $1374.11; you will save over $1,300 on interest simply by reducing your rate. Consolidating your debt into a lower interest loan can be the best way to get rid of it quickly.
8. Curb your spending
It's easy to spend money frivolously in today's society. The average amount spent on impulse purchases was $155 a month before the pandemic, then increased to $183 per month after. That adds up to $1800-$2200 a year!
The best way to get out of debt is to curb your spending. This prevents new debts from accruing, and you can use that impulse purchase money to pay down your debt.
You can start small such as not buying expensive coffee every day. For instance, you can save roughly $20 a week by making your coffee at home, and this adds up to a whopping $1,000 a year! You will learn that curbing your spending is the best way to get out of debt.
9. Live below your means
This simple lifestyle can be the best way to get out of debt. Living below your means can help you save up money to build your emergency savings account and be the best way to get rid of debt fast.
Taking a frugal approach to your spending by couponing, purchasing items pre-owned instead of new, sticking to your grocery list, and preventing impulse purchases can help you live below your means and get out of debt easier.
10. Start a side hustle
A key to becoming debt-free is increasing your income. The best way to get out of debt is to increase your income by starting a side hustle.
Almost 45% of Americans are reported as having some kind of side hustle. It's possible you can turn your hobby into a side hustle. Here are some side hustle ideas you may start to increase your income:
- Making & Selling Crafts
- Pet Sitting
- Reselling also known as flipping items
- House cleaning
- Selling baked goods
- Freelance Writing
These are just some of the many side hustles you can start to help pay down your debt. This is the best way to get rid of what you owe fast.
A few things to keep in mind
- Don't be too harsh on yourself. Remember, you now have an action plan.
- Make sure you distinguish between your wants and need and prioritize your cash allocations in budget according to that;
- While you pay off your debt, purchases of non-essentials should be put on hold as much as possible. It's okay to treat yourself (within reason) every now and then as you meet your repayment goals - it's all about keeping yourself motivated.
- Don't forget to put money aside in your initial emergency fund, even if you can only afford a small amount. The last thing you want to have to do is owe more money if an unplanned situation comes up.
Remember, it's all about adjusting your mindset and working through your plan. You got this!