Debt. There is NOTHING sexy about that word. And there isn’t much else that can cause more stress and anxiety in an individual or family.
Getting into debt is easy. Getting out of debt is an entirely different beast.
There is such a thing as ‘good debt’ – something that will grow in value or generate long-term income, like a house. A house will appreciate in value over time, and that appreciation will hopefully be greater than your interest over that same period of time.
But we are here to talk about bad debt.
The problem starts when you are sinking in so much debt that you cannot pay your bills. There is nothing more overwhelming than looking at your bank account and knowing that paying your bills for the month is going to leave you hanging by a thread. I know, because I have been there.
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We incur debt in a variety of ways: living beyond our means, unexpected health-related expenses, family emergencies, taking out student loans, taking out loans to pay for big ticket items like cars, and more. Sometimes, it can accumulate in such a way that it seems to grow beyond our control.
We are here to tell you that there is a way out of it. There is a light at the end of the tunnel. But to find it, you need to be willing to dedicate yourself to your plan.
Here are 6+ important steps to take when you need to get out of debt:
💡 (Step ZERO) You have to DECIDE.
First and foremost, you need to make the decision to pay off your debt. It requires a certain mindset: if you aren’t committed to it, it won’t happen. Period.
How many times have you told yourself that you wanted to accomplish something, only to let that goal fade away? Chances are you didn’t fully commit to it. You probably didn’t research what it would take to accomplish it. And you definitely weren’t determined enough.
Paying off debt begins with the choice to make it happen. Making the decision leads to actionable steps that you will follow in order to meet your goal. If your mind is not in the right place, you will lose focus and inevitably fall off track.
So, if you want to get out of debt, make that decision now.
1. Prioritize Your Bills
Many people suggest following Dave Ramsey’s debt snowball method, which suggests paying off your smallest debt first, and then carrying that momentum over to your next largest, creating a snowball effect. While this is a great learning experience if you struggle with discipline, it’s not such a great idea math-wise.
This is because the snowball method is a mind game that boils down to the person in the mirror, not what makes sense mathematically.
For example: If your creditor is charging you 18% interest, and you are paying off the minimum each month on your highest debt credit card so that you can focus on the smaller debts first, you may end up paying more in interest over time than you would have if you started with the big bills and worked your way down.
The debt pay-off method that you decide to take is up to you, whether you start with the big bills first or the small bills. Whatever you choose, you need to make a plan that involves bill prioritization.
Create a list of all of the bills that you need to pay in any given month, large and small. When you add them all up, what does it amount to? Chances are the the number will surprise you, even though you’re the one who spends the money each month.
Now, create three columns. The MUSTS, the NEEDS, and the WANTS and categorize all of your bills accordingly – it’s important to be brutally honest with yourself here.
I think you will find that there are only a few items that will land on the ‘musts’ list – the bills that you can’t go without to get by. This will include things like your rent or mortgage, your utilities, food, credit card payments, etc.
The point is to really visualize what you are spending each month and identify what you can truly live without.
2. Create a Budget
The purpose of creating and following a budget is to always know where your money is going. This way, you don’t get thrown for a loop when a payment is due and your checking account is sparse. You anticipated it and can pay it.
How do you create a basic budget?
- Calculate your monthly expenses
- Determine your income
- Create your debt payoff and savings goals
- Keep track of your spending and progress
When creating your budget, include all your living essentials first, or, the “MUSTS” we talked about above. Once you know that total, factor in your basic “needs” and “wants” – which you should have cut back on before creating your workable budget.
If there is room, it’s OK to factor in a small slush fund for leisurely expenses, but that is contingent on the amount of debt you’re facing.
Creating a budget will keep you accountable throughout the debt payoff process. To get started, try our Personal Budget Spreadsheet to begin logging all of your income and expenses. It will help you visualize exactly where your money is going so you know where to cut back so you can get out of debt!
3. Limit or Eliminate Credit Card Use
You NEED to take control of your credit card if you want to get out of debt. This means limiting your use so that you aren’t adding to the problem. This also means understanding how much interest you are being charged each month, any fees that are tacked on annually, and any penalty charges for late or missing payments.
My best advice? Stop using your credit card completely, if you can manage. Borrowing more money from your creditor will only exacerbate the issue, which will make the debt payoff process much longer and more difficult. And if you must use your credit card during this process, only use it on expenses you truly cannot avoid, like emergencies.
4. Find Extra Money – anywhere you can!
If you’re sitting on a mountain of debt, it may be time to prioritize your time and start a side hustle.
But I work so much already, I don’t have a lot of free time and the time I do have, I just want to chill!
Well, you won’t be able to keep chilling if your debt continues to grow.
There are loads of ways to earn extra money, even if you already work full-time. You can become a freelancer or a blogger, sell gently used clothes or household items, find odd-jobs if you’re handy, create goods to sell on sites like Etsy, etc.
If your free time is limited and you can’t land a side job, you can always take online surveys which can get you an extra $300+/month, depending on how many companies you register with. Online surveys are effortless – all you have to do is share your opinion! And you can even do them from the comfort of your own home; you don’t have to go anywhere, report to anyone, or even get dressed.
Check out online sites like Swagbucks ($5 sign-up bonus), Inbox Dollars ($5 sign-up bonus) and Survey Junkie. They will pay you for doing simple things like watching videos, taking surveys, shopping online and even searching the internet.
5. Only Spend What You HAVE To Spend
Living frugally isn’t always fun, but it’s a must if you need to get out of debt. It can be hard to make major lifestyle adjustments, especially if you’re used to the finer things in life… but guess what?
The finer things will still be there when you’ve relieved yourself of your debt. Your debt will only get worse if you don’t take the time to take care of it.
Only spend what you have to spend – anything leftover should either be set aside in a savings account or immediately put toward your debt.
You’d be surprised how many things you can stop buying or find cheaper alternatives of. We spend so much on things that we either don’t need, or shouldn’t be buying because of what we owe our creditors.
Focus on your needs, not on your wants.
6. Cancel Unwanted or Under-utilized Subscriptions
Subscriptions may not always be expensive, but sign up for enough of them and they will add up fast: $1.99/month here, $3.99 there, $14.99 in another place…
If you’ve got a bevy of monthly bills for things you barely use, ditch ‘em!
Smart apps like Trim Financial Manager are an awesome way to save money. Trim is like having a mini personal finance assistant – it helps you automate your savings to clean up unnecessary expenditures, like subscriptions you never use – or subscriptions you just can’t afford right now.
Ironically enough, I did exactly that ^^
I realized I had an Audible subscription that I haven’t used in over 6 months so I kicked that subscription to the curb with a simple request to Trim.
With Trim, I cancelled almost $40/month of subscriptions I no longer use – some of which I completely forgot about or was too lazy to cancel on my own! That’s $480 in savings a year! All I had to do was tell Trim to cancel them for me. In the last month alone, it’s saved its users over $1,000,000!
- How does it work? Trim will analyze your accounts to determine how much you are spending and where you can save more money. He will find recurring subscriptions and take care of cancelling those that you no longer use, negotiate lower prices on your bills (such as cable, internet and mobile) by up to 30%, help you build your savings and much more.
- Is it safe? Trim is bank-level secure with 256-bit SSL encryption, 2-factor authentication, and read-only access. So, yes.
- What does it cost? NADA!
Check out some of our other favorite money-saving apps here.
If you are tight on cash, you may even want to consider canceling “luxury” bills like Netflix, Spotify and Hulu. Yes, we love them and they feel oh so necessary, but you’re in debt, soooo…
Remember, the faster you pay off debt, the sooner you will be able to breath again!