Getting Out of Debt

Figuring out how to get out of debt is one of the most freeing things any person can do with their personal finances. It’s tragic that most people have no idea how to turn their dream of a debt-free life into reality. Most Americans are buried in debt from mortgages, credit cards, personal loans, bills, and student loans. In 2020, Experian reported that the average American owes approximately $92,727 in total debt. It’s the highest amount on record in the US.

Chances are if you’re reading this article, you probably have some debt in your name. This includes me. And if you’re in a financial hole due to debt, the only real solution is to change your debt habits and start getting out of debt.

This article is about digging your way out of debt. Being in debt can be stressful to your health. Digging yourself out of debt can boost your mental and physical health. Having more income freed up from debt may mean greater financial confidence, increase morale, and better personal finance outlook to save more in your future.

Try the Debt-Snowball Method

The debt snowball method is often touted as the best and most efficient way to become debt-free. When choosing this option, you need to start the process by listing all your debts in order from the smallest balance to the largest. The main idea is to create a budget that accounts for making minimum payments on all 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 completely paid off.

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 taken cared of, leaving only your largest balances behind.

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. Derek from LifeandMyFinances.com has a very helpful debt snowball calculator you should check out if you’re interested in this method.

The Debt Avalanche Approach

The debt avalanche works similar to the debt-snowball method in that it 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 your low interest debts. As the months progress, you’ll continue to attack all of your balances until they are all gone for good.

Check for Damage Report

Make sure to review your credit rating for any inconsistencies or patterns of bad behavior. You can get your credit rating the same way lenders and landlords do, which is from the three credit bureaus: Equifax, Experian, and TransUnion. They can provide report on most consumer credit.

Damage Control

First step is to get rid of troublesome accounts and pay down your overall debt on time. Use automatic payments and tighten up your budget to get your debt under control. This step will keep your credit rating from getting worse and improve it over time.

Transfer Balance with a 0% APR Credit Card

With balance transfer credit cards, you’ll get 0% APR for anywhere from 12 to 21 months. Ironically, a credit card might be the solution to credit card debt. In reality, certain types of credit cards offer introductory offers that help you save money and get out of debt. Essentially, 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.

Refinance or Consolidate

By refinancing certain loans, you may be able to get a better deal and save money in the process. 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 that in turn can help you get out of debt quickly. Debt consolidation loans are amortized over time, and you’ll likely end up paying less interest compared to paying minimum payments on your credit cards.

Consider Debt Settlement

You can also go through a debt settlement company; however, you’ll pay more by using them. If you are way behind on your debts and are unable to pay them off, you may be able to settle your debts for a much smaller amount. One way to do this is to have a lump sum payment that you can offer the lender. This works well with old credit card and consumer debt. 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 claim that you have not paid off your debt.

Cut Unnecessary Expenditures

The easiest way to hack your spending plan is to start with the so called low-hanging fruit. If you’re not sure where to start, get out your bank statements from prior months and figure out where your money has been going. What spending went on dining out? How much impact does small trips on your bottom line? Can you really afford the car payments? Once you identify your financial leaks, drastically cut them all out from your monthly expenses and see how much cash you can free up in the process.

Pick Up A Side Hustle

Once you have an idea the best way to pay off your debts and cut your spending, then it’s time to speed up your journey to pick a side hustle or take on a part-time job. By earning money through additional sources of income, you can use the extra cash to pay down your debt faster. There are myriad ways to earn extra money if you look hard enough. Depending on your current job, you may even be able to work overtime or pick up more hours. You may even consider doing a home-based business as a side hustle, or look into becoming an Uber driver, which is a great side hustle because you can create your own schedule. Doing yard work in your neighborhood is another side hustle idea and try freelance writing and editing jobs. Pet sitting, babysitting, and/or house sitting are some good ideas as well. Be creative, and you’ll find there are plenty of ways to earn extra cash.

The Big Picture Assessment

Not all debts are created equal. Part of your big picture planning is that you’ll need to establish a hierarchy among your debts and lay your plan of attack. Debt management experts recommend targeting the high-interest debts first and the non-deductibles. Next, attack the low-interest debts and the tax-deductibles debt last. With your high-interest debts, stop using them immediately.

Final Thoughts

Managing your money effectively starts with careful planning. If you can’t dig yourself out of debt, you may have to declare bankruptcy, which can ruin your credit rating and make you ineligible for loans or credit for years. Yet if you’re able to climb out of most financial holes by following the steps I’ve outlines here, congratulations! By putting money aside for retirement and personal savings, and by making sure not to go back into debt, you’ll be able to build wealth and secure your financial future not only for yourself, but also with your loved ones.