Photo by Towfiqu Barbhuiya on Unsplash
This post was written by Michael Dinich and originally appeared on Wealth of Geeks. Michael launched Your Money Geek to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. (Note: this post may contain affiliate links.)
There are many reasons why people get into debt.
Many don’t know how to get out of it, but this article will show you what you need to do to get that weight off your shoulders! This post will give you some practical suggestions on how to save money and pay down debts.
It is possible for anyone, regardless of their situation, income level, or credit score. The first step is recognizing the problem and taking steps towards solving it. So let’s get to the steps to answer how to get out of debt.
Why Is Getting Out of Debt Fast Worth it?
90% of individuals say that money has an impact on their stress levels. A study found this entails impacts your health.
Having financial problems can cause it to be harder to save, budget in advance, or even start writing a list at a local store.
If extra debt money was available, it might be worth boosting financial confidence, morale, and opportunities to save. Financial experts regularly recommend two ways of reducing debt: the “avalanche” technique and the “snowball” technique. The two programs will help you focus on debt reduction. The snowball method is first to get your debts paid off, then take the next payday.
Both of these methods, however, require you to structure yourself and stick to a routine. If you would rather have support and someone to help you, it would be worth joining a service like Resolve to support you in solving your debt fast.
1) Stop Borrowing Money
This may seem pretty straightforward, but many people don’t realize that borrowing money is the first step to accumulating more debt. So stop doing it! If you’re in a situation where you need credit cards or loans for emergency purchases, then find other forms of financing, which we will cover later on in this article.
2) Resolve Your Debt, Affordably
If you’ve tried to resolve your debt but couldn’t afford the high fees that come along with many solutions, there is still a way forward. Resolve is an app that connects people with experienced debt agents for a low monthly membership fee. They will help you lower interest rates, stop collection calls, negotiate with creditors to refund fees and provide budgeting tools, all for a monthly subscription that averages about $17. After resolving your debt, you can give a tip for completed services, but it is entirely optional.
It feels good to be free from the stress of debt collectors calling all day long or worrying about how much money is left in your bank account at the end of each month.
Find out more about Resolve here.
3) Plan to Pay off Debt: Try a Debt Snowball
For getting rid of all of the bad debts within the fastest possible time, you should use the debt snowball method.
What Is a Debt Snowball?
Debt Snowball is a debt repayment technique where you prioritize your debts and start with the smallest balance, paying off one at a time and moving to each larger balance. Personal finance author Dave Ramsey popularised the method, and it can be suitable for anyone who wants to build momentum in paying off debt.
How To Use the Debt Snowball Method To Pay Off Debt
If you want to try this method for getting out of debt, it’s pretty easy to do, simply:
- List your debts from the smallest balance to the largest; consider student loans, personal loans, and credit card debt.
- Pay the maximum amount per month on your smallest debt while paying the minimum payment allowed on the rest.
- After the smallest debt is paid, continue applying the same principles to the second smallest debt.
- Continue this process until all debts are paid and you are debt-free!
4) Use the Debt Avalanche Strategy
An alternative method to the Debt Snowball method is the Debt Avalanche which is another good option for paying off your debt.
Getting out of debt with this method works like this:
- You make a list of your existing debt and sort them through the highest interest rates to the smallest.
- Pay off debt faster by setting aside extra money to pay off your debt on the highest interest rate. Make minimum payments on the rest of your debts until you pay off debt on the highest interest loan.
- By paying off debt that’s the highest interest rate and then repaying your debts, you’ll reduce debt and reduce the overall interest rate you pay.
- Continue to work through this method until you are debt-free.
Becoming debt-free in this method works exceptionally well as long as you have an additional amount of money in your budget to make extra payments.
5) Renegotiate Credit Card Debt
Many people in debt don’t realize they can renegotiate their terms with credit card companies. If you can call up your bank and ask for more favorable rates, then it will be much easier to pay off the debt faster without having to worry about accruing interest on top of what you already owe.
All you need to do is ask! As long as your repayment history is solid, it would be best if you had an excellent chance of getting better terms.
You can apply this tip to other expenses to lower your overall bills, as credit companies aren’t the only business that will want to keep your business. Try contacting the below too and trying this method:
- Your utility providers
- Any insurance providers you have
- Phone bills
- Any memberships that you are out of contract on (pretend to cancel and see what they are willing to offer you to stay)
It’s always worth asking! Imagine what difference you could make toward your financial goals by saving 10% off each of your bills!
6) Consider Balance Transfers & Debt Consolidation
Debt consolidation and balance transfers can be helpful to see all of your debt in one place. They help you pay off the debt by putting all the companies you owe money to in one place.
If you struggle to organize your debt and want a manageable monthly payment, this option could be worth exploring.
Balance transfers on credit cards can also be worth exploring if you have a decent credit rating and have started to pay interest on an expired 0% credit card. For instance, if you have multiple credit cards with debt, you could use a balance transfer to transfer all credit card debt so that it is in one place and you are paying much less interest.
What to watch out for in this method:
- Balance transfer fees often apply, so make sure to check.
- Some credit card providers will only let you transfer a limited amount, so be sure to check before you apply.
- This method would support you to get out of debt, but to pay off debt fast, you will need to make extra payments on top of the monthly consolidated debt.
7) Create the Best Budget To Pay Off and Stay Out of Debt
The best budget for you might be quite different from another. Flexibility is a vital ingredient in success and will keep you in check during a crisis.
Use goal-setting to help guide your budget. Ask yourself questions like:
- When do you want to be out of debt?
- What are you willing to give up to get there fast?
Make sure there is freedom in your budget for savings so that you avoid going into further debt but don’t have so much freedom so that you allow yourself to keep spending.
The easiest way to pay off debts fast is to make sacrifices. If you don’t go without what you don’t want, you will never be able to get rid of your financial debt. Use your learned experience to create a better budget than last time.
Steps You Should Take to Start a Budget
1) You need to know where you stand today. Start by writing down all of your committed expenses and compare that to your current income.
2) Review your current committed expenses – are there any you can reduce? For example, gym memberships you don’t use.
3) Read about some of the different budget methods and pick one that sounds the easiest for you to follow and what you will most likely stick to. My personal favorite is the 50/30/20 budget.
Make Sure To Avoid Past Mistakes When Setting a Budget
People are creatures of habit, and spending money isn’t an exception. We shop in the same markets, eat in the same restaurants and drive the same vehicle.
This will cost you in the long run if you don’t make changes, affecting your ability to take responsibility in the future. If you don’t modify your financial habits, you’ll end up in debt forever. You cannot make do without taking that step. You have to make better decisions in what you do. You are likely to see a change in your spending habits immediately.
Think about what habits you have that could be costing you extra money on your budget. For example, how many times are you eating out per week?
Make Sure To Create a Family Budget
It is common to see a household member be responsible for all their family’s financial affairs. Sometimes this means only that one individual knows the family’s finances. If you are trying to succeed, it’s crucial to have a strict budget to clear everything, and everyone knows where your debt goes.
It would be best to have everyone involved in the house as a participant in tracking and budgeting steps. Come clean with your partner and friends. But if they aren’t familiar with your finances, then they cannot understand your situation. You must involve them in this process so they see the same thing. There might be some challenging discussions.
8) Work Side Hustles
Sometimes having a strict budget isn’t enough. You might find that even on the most stringent budget, you are still living from paycheck to paycheck. If this is the case for you, it might be time to try a side hustle to generate extra cash.
If the task of doing another job seems exhausting, make the job a short-term job where you can earn enough money for paying down debts. You can also do jobs at home, such as selling old clothes online, renting out a room on Airbnb or hosting international homestay students.
Related: FI School Lesson 9: Side Hustles
9) Use the Power of Extra Payments
Making extra debt repayments can reduce your credit utilization ratio, which can improve your credit score. Combine this method with either the debt avalanche or snowball method mentioned earlier in this article so that your extra payments are strategic.
10) Reduce Your Spending
The average cost per month for impulse purchases was $155 and then rose to $183 a month when the pandemic occurred. This amount is about $1,800–2,700 annually if you pay it off. How can this be improved?
The only way to get out of debt is to cut down on your expenses. It prevents new debt from accumulating and gives you an incentive to buy something to pay down your debt. Start small by not buying too much coffee per day. For example, make coffee at home for less than $20 a week, totaling $1,000 per year. It will become easier for you to curb your spending.
Related: Learn more money-saving strategies from around the world in the How Much Does it Cost to Live the FIRE Life interview series
11) Face the Music
If you’re trying to have unopened bills disappeared, the first step is to admit you’re wrong. It’s time to face the music and accept you need to make some changes to get your financial life back in order.
If your expenditure regularly exceeds your net income, either you must dramatically change your lifestyle (sell your home, buy a smaller apartment, take part in a second job) or declare bankruptcy. And sometimes, you might want to look at another step depending on where you are going. Start introducing money to your budget, or you may have to file for bankruptcy. However, there are ways to improve your finances before taking that step.
12) Consider Becoming a One-Car Household
The average owner of a car spends more than $9k per year on buying and operating. If you decide that you’ll sell your second car, even taking the occasional cab may still be cheaper than owning a second car.
Plus, you could use the money you get from your car sale to help you pay off some debts, and if you have your car on a monthly loan, by selling it, you will free up more of your monthly budget!
13) Create an Emergency Fund
Immediately after paying off debt, you should start setting up the emergency fund. If you just saved 10% of your salary each month in 10 months, you would have a month’s salary saved. Think about that if you ever got into a situation where you lost your job, how beneficial it would be to have a month’s salary saved to get you back on your feet.
Related: You may also want to consider making an emergency plan
14) Get Out of Debt by Living Below Your Means
Trying a simpler life will help you get rid of a lot of debt as fast as possible. Living below your means enables you to save money to build your emergency savings account and helps you get out of debt, as you will be able to use any money saved to make extra debt payments.
Making frugal choices with coupons, using existing items rather than new, sticking to your list of groceries, and refraining from impulse purchases can help you get rid of debt sooner. When you live below your means, shop frugally even if your wage allows you to shop for more expensive items.
Some actions you could take to live below your means, meaning you spend less, include:
Get Rid of Your Cable
The average cost of cable is $64 a month. If you struggle to make ends meet every month and want to become debt-free, you need to cut back on not essential items.
A cable is one of those non-essential things in life. You could save money by replacing your cable subscription with an online subscription service like Netflix, which is a fraction of the cost.
Use the money saved on cable to pay over minimum payments or build up your emergency fund.
Cut Up Your Credit Cards
Make steps to stop your impulsive spending by cutting up your credit cards. This is more a preventative measure, but it will also prevent you from making any impulse purchases.
Do a Grocery Brand Swap
Swapping all of your branded groceries for non-branded (generic) groceries is an easy way to live below your means and an easy switch to make to save money.
Have a No Spend Month
Have a month where you agree not to spend anything apart from essential purchases like food shopping. This will help you get into the mindset of living below your means.
Write down at the start of the month what you are giving up. At the end of the month, compare this list which what you missed. You might be surprised that you haven’t missed out on as much as you think.
Related: In the How Much Does it Cost to Live the FIRE Life interview series, my interviewees share how they happily live below their means while striving for financial independence.
How To Get Out of Debt Fast: Bottom Line
It’s hard to get out of debt and can take years if you don’t know how to do it. Fortunately, there are a few simple steps that will help you pay off your bills faster than ever before. Whether you want to pay off a student loan or are seriously in debt, the tips in the article can help you get back on the right track.
We hope these tips have been helpful, and we wish everyone the best of luck on their journey towards being free from debt!
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