This post may contain affiliate links. Please read my disclosure for more information.
Learn how to budget the right way! Join the FREE BUILD A BETTER BUDGET BOOTCAMP.Click here for details!!
Wondering how to get out of debt?
Being in debt is one of the worst situations you can be in. It takes a toll on a person’s life with all the sleepless nights, strained relationships, and being stressed out all the time.
You feel helpless, constantly trying to figure out how to get out of debt, it never leaves your mind. This is no way to live your life. To be honest, you aren’t really living a life at all, you are just trying to survive debt.
I know this because I was in the same boat that you are in now. Always trying to figure out how can I get out of debt and thinking that it seemed impossible.
Even though it seems like you will be in debt forever, it really doesn’t have to be this way. You need to be proactive in paying off the debt it is not an easy road, but it can be done.
Here is the thing, you need to want it bad enough, and if you do, then you need to make a commitment right now. You have to be all in because getting out of debt can be one of the hardest things you will ever do.
With that being said, you absolutely can get out of debt with a lot of discipline, a commitment, a plan and a whole lot of hard work. Trust me, once you are free of your debt, you will have a new lease on life.
You can read “How Being Debt Free Will Change Your Life” for some motivation to get out of debt.
Change your money attitude
You need to change your money attitude. After all, your behavior towards money is the reason you are in debt in the first place. You have to change your mindset from being a spender into a saver. Changing your money mindset is the first step to getting out of debt.
Let me ask you, how often do you tell yourself “it’s only 20 bucks, it’s not going to make a difference” or “Oh well, our cable went up again but there is nothing I can do about that.”? If you’ve ever thought of money in this way, then you need to change how you perceive the value of money.
Guess what? Saying “It’s only 20 bucks” once a week adds up to $1040 a year. No, money isn’t everything, but right now, it is stopping you from living your best life.
Until you are debt free, you need to treat it as if it is everything to you…because it is. It’s preventing you from being happy and living the dream.
You need to be all in to get out of debt
Now that you know what’s at stake, I’m sure that you are all in, right? What I mean by this is that you ready and willing to do whatever you need to do (legally, of course) to get out of debt. This means that everything you do from now until you are debt free is geared toward paying off debt.
You have to stop wondering how to get out of debt and start taking action. Every single penny you can save or earn needs to go on your debt.
So are you all in?? Great!! Let’s get started…
Control your spending to prevent more debt
Once you have changed your money attitude and have set your mind to do whatever you need to do to get rid of debt. Controlling your spending should become a whole lot easier.
Maybe you spend more money than you should because you get bored, or you put yourself in situations that you really should stay away from.
There may be many reasons why you overspend and aren’t living below your means. Identify what triggers you to spend money when you know you really can’t afford to. Find something to replace shopping & spending when these situations arise.
Where is your money going?
Do you go shopping when you are bored? Find a hobby to replace shopping, or better yet, take on a side hustle which will help you stop spending and allow you to earn money to pay down debt at the same time.
Maybe you and your friends always hit up the mall on the weekends for fun. Replace this activity with a cheaper alternative. If money burns a hole in your pocket and you just know that you can’t control spending if you have it with you, then leave your cash and cards at home and bring only enough to cover planned purchases.
There are many reasons that you may overspend, you must get down to the root of the problem and find a way to deal with it. You can find more tips on how to do this in How To Control Impulse Spending.
Build an emergency savings to prevent more debt
Having an emergency savings account is a must, even more so when you are trying to get out of debt. You know as well as I do that unexpected expenses happen all the time. If you are not prepared for them they will cause you to get into more debt than you are in now.
I know many people want to make a plan on how to get out of debt, jump right in and try to get rid of it as fast as possible. This is a good thing but only after you have a decent emergency fund set up.
If an emergency situation arises and you don’t have an emergency fund to fall back on, you will end up deeper in debt. I’m sure if you thought about it, you could remember plenty of times that you used a credit card as your backup when something unexpected came up.
I probably don’t need to tell you this, but credit card debt is the worst kind of debt.
Open a dedicated account for your emergency fund
Step one is to set up a savings account at a bank other than the one you do your normal everyday business with. I suggest an online bank such as CIT Bank for two main reasons.
One, you cannot instantly transfer money into your checking account with a simple click of the mouse on your online banking site or hit up the ATM anytime you are short on cash and need a few bucks.
This is for an emergency only and grabbing a few bucks to make a Starbucks run does not qualify as an emergency.
Don’t worry about not being to access your money instantly. Typically, you can get your money transferred to your regular bank within one business day if you need it.
This will prevent you from dipping into your emergency fund when you want to spend money on a whim, yet you will still be able to get it in time to pay for that “real” reason you may need it.
Cit Bank is the best option and my recommendation for your emergency savings.
- Currently, they pay 2.25% APY through their savings builder account.
- Have no opening or maintenance fees.
- Compound interest daily to maximize your earning potential.
- Only require $100 minimum deposit to open an account.
Earning interest on your money
The second reason is that online banks pay you way better interest rates than a traditional brick and mortar bank. In fact, when I compared the interest rate that CIT Bank was offering compared to my local bank, I discovered that they paid over 18 times more interest than my bank.
It just makes so much more sense to grow your money faster, I don’t know why anyone would not want that. There are many people who are a bit apprehensive about online banks, but as long as it FDIC insured, it is just as safe as any other bank.
Once you have this account set up, it’s time to fund your account. I suggest that your first goal is to get that account up to $1000 before concentrating on paying off debt. Once you are out of debt, try to get your emergency fund to at least 3-6 months’ worth of living expenses.
Create a budget
Now that you have cut back on spending, and have an emergency fund, you need to create a budget to stay on track with your debt repayment plan. There is no way out of this. Many people don’t like the idea of a budget, but it is essential to stay on track while paying off debt.
It can be difficult to stick to a budget at first but believe me, it will get easier. Before you know it, it’ll become second nature. Your budget will become your best friend in helping to keep you on track with your spending while you are working to get out of debt fast.
How to budget for success
The keys to creating a budget you can live with are to make sure you include everything needed so you don’t fail when something arises that you forgot to budget for such as yearly bills that you don’t really think about until they are due.
You also need to give yourself a bit of wiggle room in your budget. It can be tempting to try to squeeze every single penny out of your budget when you are determined to get out of debt.
Although this may seem like the right way to get out of debt faster, this is a mistake and cause you to fail at your budget and maybe even give up.
Plan for unexpected expenses
Instead, plan for the unexpected because you know that little expenses arise all the time. This way you won’t feel like you’ve failed at budgeting because you’ve given yourself some padding.
Plus, if you don’t end up needing the money, or have some to spare at the end of the month, you can make an extra contribution to your debt.
Consider using a home warranty program to pay for sudden home appliance repairs or replacements. It’s like an insurance policy for your home systems and major appliances.
These types of warranty programs do come at a cost but it’s a whole lot cheaper than finding money to replace your heating system or a major appliance. This could be a saving grace, especially when in debt!
Organize your finances…Take control of your money…Then get on with your life
Calculating how much debt you are in
Next, you need to face the music and calculate exactly how much debt you are in. You will never be able to get out of debt by ignoring it. I know it can be very scary, but it has to be done.
Grab all your credit card and all other bills and calculate the total amount due. List each bill on a piece of paper. Next, to each write down the total balance and the interest rate you are being charged.
The real cost of being in debt
While reviewing your credit card bills, did you notice how much of your monthly payments are going towards paying interest? This is money that you are basically flushing down the toilet because of your debt. Let’s put this into perspective.
Take for instance a $500 car repair bill, if you put that on credit and only pay the minimum payments, you’ll probably end up paying close to $1000 in principal and interest when all is said and done.
Yes, you’ll pay almost double the original amount by using credit recklessly. This is something you really need to think about before whipping out your credit card.
Credit Card interest is keeping you in debt
Let me show you an example…
Below is a snippet of a credit card bill; this card had a balance a little below $3000 with a minimum payment of $70.
Notice that by paying only the minimum payment every month, it will take 14 years to pay off? YIKES… Not only that, you will end up paying over $6000 in the end. That’s 50% more in interest alone.
Once you know what you are up against, you will have a better understanding of what you need to do and how to get out of credit card debt, you can make a plan.
You may have also noticed that if you pay $108 per month instead of the $70 minimum payment, it’ll cut the repayment of this debt down to 3 years instead of 14 years.
So, by paying about 54% more, just $38/mth more on this card you’ll kick it to the curb 11 years faster….
What?? I’m pretty sure that if you knew a misly $38 a month could help pay off a debt 11 years sooner, you would be able to find it in your budget. Right?
Two of the most common ways to pay down debt are the “Debt Avalanche” method and the “Debt Snowball” method.
The Debt Stacking method is done by attacking the debt with the highest interest first. Once that is paid, you stack the amount to the minimum payment you are making on the next highest interest debt and so on until your debt free.
The Debt Snowball method is where you attack the debt with the lowest balance first. It a very popular method that Dave Ramsey of the Total Money Makeover recommends using. Once that first debt is paid, you snowball the amount you were paying into the minimum payment on the next lowest balance debt and so on.
Personally, I prefer the Debt Snowball method; although the Debt Stacking method will save you some money on interest. In the long run, you see results faster with the Debt Snowball method.
Just seeing the results of having one debt paid off is so encouraging and will help to keep on going.
It’s your choice which get out of debt plan you use. You just need to pick one and stick with it no matter what and you will soon start to see the light at the end of the tunnel.
Set realistic goals
Anyone serious about figuring out how to pay off debt wants to get it done and over with as soon as possible. That’s the goal, Right? The thing is that you must set realistic and achievable goals.
It’s not realistic to set a goal to get out of $50,000 of debt in one year when you are earning $30,000 a year. Not that this can’t be done. But it would require you to increase your income considerably with a side hustle and drastically reduce your expenses.
Debt repayment goals
As you start earning more money and reducing your expenses, you can adjust your goal at that time.
Setting smaller, more manageable goals is a good way to go about it. So instead of committing to pay off $10,000 of debt this year; set a goal to pay off $833 of your debt every month or $192 a week. You can use this nifty little debt repayment calculator to find out if your goal is realistic.
Every week or month you reach your goal is one step closer to getting out of debt. It is more encouraging because you are achieving smaller wins that will lead you to your ultimate goal of becoming debt free.
You can read The Ultimate Guide to Reaching Your Financial Goals for some more tips on creating and achieving your goals.
Debt consolidation can be a good option to get a helping hand to get out of debt. By consolidating your debt, you are able to reduce the amount of interest you are paying. This will shorten the time it takes you to pay it off.
It also helps you to manage your debt payments much easier. You will be making one monthly payment on your consolidated debt. This is way easier than juggling 10 payments a month to 10 different companies. It will allow you more time to concentrate on earning extra money and reducing your expenses.
Negotiating better interest rates
Negotiating better interest rates is another way that’ll help get out of debt. It’s not as scary to do as it sounds and it can save you a bunch of money.
Simply call your creditors and let them know that you think the interest you are paying on your credit card is higher than you’d like it to be. Let them know that you’ve found better rates but would rather continue doing business with them.
Many time, this simple phone call will do the trick. If a company refuses, the first thing you should do is speak to a manager or supervisor to see if they can help you since they have more authority to do these things.
If they still refuse, ask for a reason why. It could be that your credit score is a mess and they know you won’t be able to transfer your balance. If this is the case, you can try again once you improve your credit score.
Reduce monthly expenses
Now that you know what you are facing, drafted a budget, created a plan of action and set realistic and achievable goals, it’s time to reduce your expenses.
Take a good hard look at your budget and everything you currently spend money on every month. Cut out as much non-essential spending that you can.
Ways to save money to pay down debt
Next, find ways to cut out unnecessary expenses. Get rid of anything that is not essential. This means gym memberships, music streaming services, subscriptions to magazines and other things like this.
You know that there will be some things you think you can’t live without. Think of ways that you can still save money while not feeling too deprived.
Substituting certain thing for less expensive versions can be a great way to save money to pay down debt. You are still getting what you “think” you can’t live without.
Trim is another great resource to help you detect and “trim” unnecessary expenses. They’ll find subscriptions you are paying for that you might not realize you are paying and don’t need. They can even find you better rates on cable, internet and more.
Easy ways to reduce spending
Think in terms of making your own specialty coffee at home instead of costly Starbucks coffees. How about getting a digital TV antenna and Netflix to cut out the cable? Why not look for a less expensive cell phone plan to save on this costly expense.
Find ways to reduce the amount of money you pay for your needs as well. Look for ways to save on your energy bills or see if you can refinance your mortgage with a lower interest rate.
Start meal planning to save money on your grocery budget. Erin from $5 Dinners has a great course called The Grocery Budget Makeover that will definitely help you reduce your grocery budget by leaps and bounds.
She offers a free workshop to start saving money quick if you need help saving money on groceries.
There are many more ways to save money by reducing your expenses. Scrutinize every expense you listed in your budget and ask yourself, “Do I really need this?”, “Is there a way I can reduce the amount I’m spending?”, or “Is this worth staying in debt for?”
Earning extra income will allow you to kick your debt free journey into high gear and pay off debt faster. There are tons of things you can do to earn some extra cash to throw at your debt. You can work overtime, start a side hustle, and find ways to earn some passive income to bring in more money.
Think outside the box, you can get a second job, have a yard sale, complete surveys in your spare time, rent out a room, babysit, sell your stuff, mow lawns, clean houses, run errands for elderly neighbors or walk dogs. I can go on and on, there are endless ways to bring in extra income.
Lastly, any time you come across any found or unexpected cash, make sure to throw it at your debt. By found money, I mean cash gifts, work bonuses, income tax returns and any other cash that you might acquire.
I know that it’s nice to be able to treat yourself with this found money, but in the end, it’ll help you get out of debt much sooner. Once your debt is paid, you can treat yourself. For now, getting out of debt is the reward you should be focusing on.
Never give up
Now that you know how to get debt free, never give up on the fight. It is a lot of hard work, but it will pay off in the end. Keep at it and do whatever it takes. Believe me, you will be so much happier once you are debt free.
Need help planning your debt free journey? Grab your Financial Freedom Debt-Free Planner today. This is the planner I create when I was in over my head in debt. It helped me get organized and stay motivated throughout the whole process. And I’m sure it’ll help you too!!!