So you’ve decided to face up to your debt and take measures toward eliminating it. First of all, congratulations—you’ve already made the first and most important step simply by confronting the problem. And while understanding how to get out of debt has a learning curve, it can be done.
To help with that learning curve, this article will discuss how to get out of debt by taking action, such as outlining a get out of debt plan, lowering your expenses, setting up a budget and following one or more of the proven debt relief methods.
1. Get your finances in order
If you want to develop a successful how to get out of debt plan, your first step is to know just how much you owe by auditing your monthly spending (and tracking your expenses on a spreadsheet). Look at your bank and credit card statements and add up all your debts, including your credit card bills, mortgage, car payments, loans, and any other debts you might have.
Then, add up all of your other monthly expenses, like groceries, entertainment, restaurants, and transportation costs. That will tell you how much you owe, where most of your money is going each month, and if you have money left over each month. Knowing this information will help you determine exactly how to get out of debt, and whether you may need professional assistance.
2. Come up with a plan to get out of debt
Depending on how many credit cards you’re dealing with, how much you’re paying in interest, and a few other factors, your choice of which method to use to pay down debt could be straightforward. All of the following methods involve applying extra income towards your debt every month until it’s paid off. So if you don’t have extra cash coming in, you may want to consider other debt relief options. But, let’s consider these first.
The debt avalanche method helps you save money by getting rid of your highest-interest debt, and is likely to save you the most money on interest compared to other methods. This may be the right get out of debt plan for you if you have several credit cards with high interest rates since it eliminates high-interest, “toxic debt” first.
Here’s how to get out of debt using the avalanche method:
- Identify which of your credit cards has the highest interest rate. If you have more than one card with the highest rate, choose the card that also has the highest balance.
- Each month, pay as much as you can toward paying off that card.
- Pay only minimum payments for all other cards.
- Once you’ve paid off the card with the highest rate, move on the next highest-interest card and repeat.
With the debt snowball method, you use your extra cash to pay off the credit card with the lowest balance first, which is a good option if you have a lot of cards with low amounts. You may not get rid of your total debt quite as efficiently as you would with the debt avalanche method; but with the debt snowball method, you’ll eliminate individual debts faster and get a sense of accomplishment sooner.
Here’s how to get out debt using the snowball method:
- Identify which of your credit cards has the lowest total balance due.
- Put as much money as you can toward paying off the balance on that card as soon as possible.
- Pay only minimums on the other cards.
- After paying off that card, move on the second-lowest balance until you work your way to the highest.
3. Start budgeting and paying off debt
The most important part of learning how to get out of debt is having a clear plan for how you spend (and save) your money, also known as budgeting. The first step to creating a budget is figuring out your monthly income. You can do this with a simple pen and paper, or by using a budgeting worksheet.
In your budget, you need to include your monthly income and then account for two types of expenses that will get paid from your income: fixed and variable.
- Fixed expenses. Those that are the same each month, such as mortgage or rent, internet bill, and insurance premiums.
- Variable expenses. Costs that fluctuate from month to month, such as groceries, utility bills, and other miscellaneous expenses.
To get an average monthly estimate of your variable expenses, add up your spending from previous months, then look for any upcoming events or special occasions for the rest of the year that may require you to spend more. Add those costs up to get a yearly estimate, then divide by 12 and put that number down as the average cost each month.
Once you account for your monthly expenses, subtract that total from your monthly income to get the total amount of money you have left over to use for paying down your debt. If your expenses are higher than your income, you need to go back and adjust how much you’re allotting to each expense so you can end each month with extra money.
Make sure you don’t spend more than you have allotted for each expense. Keep in mind that as the months go by, your expenses or income may change, so be prepared to update your budget as necessary to ensure you put extra money toward paying off your debt.
4. Break the cycle of debt: cut back on your expenses
Knowing how to get out of debt is just the beginning. To keep you from getting back into debt you’ll also want better control or even reduce your expenses. Here are a few simple things many experts recommend to control costs each month so you can have more money to put toward paying off your debt:
- Make coffee at home and pack your own lunch
- Carpool or take public transportation
- Eat at home and avoid takeout
- Be frugal with online subscriptions
- Cancel your gym membership if you don’t use it often
If drastic cost cutting feels too restrictive and keeps you from being motivated to stay on a budget, then consider curating your expenses instead of cutting them across the board. That means you choose to spend money, but only on key items that bring value and joy and keep you motivated. For instance, keep that one special tea that you brew at home each morning, but eliminate four weekly trips to Starbucks.
There are so many more ways to save more money every month, so do whatever feels easiest and right for you. Just make sure you apply all the money you save towards your how to out get out of — and stay out of — debt plan.
5. Build a stronger financial future: Earn some extra cash
Increasing your income will help add more money to your budget for paying off your debt and keep you on the right track once you have achieved that goal. If you’re in a position to ask for a raise or even find another job that pays better, then pursue those options.
You also have a lot of options for finding a side hustle. When the world changed in early 2020 with the COVID-19 pandemic, we learned that remote and side work can be an option for many more of us than before. Now there are more side or gig economy jobs than ever, including freelancing in everything from graphic design to accounting.
You can also earn some extra cash by selling items you don’t use or even scouting out used items that you could resell for a profit. If you have items you don’t use, you can sell things on sites like eBay, Merci, Tradsey, or Nextdoor. Just look around your home and ask yourself whether or not you really want to keep it. If not, it might be converted into cash and used to pay off your debt, or even build a savings fund for your future.
6. How to get out of debt through consolidation
One alternative to making multiple payments to various creditors is to consolidate your debt into a single payment, but it’s not for everyone. This option probably only makes sense if you have good enough credit to qualify for a much lower interest rate than the average of your existing debts. Also, debt consolidation doesn’t lower the principle amount of debt owed, like some other options could.
There are a few different ways you can consolidate to get out of debt, including:
- Balance transfer cards. Many banks offer credit cards with high limits and low introductory interest rates (often 0% for the first year) that allow you to transfer existing debts to that one card. Keep in mind, though, that fees may be charged for each transfer and the rate may go up quite a bit after the introductory period ends.
- Consolidation loans. These are personal loans that you can use to pay off your existing creditors, consolidating your debts into a single account. These are fixed rate loans, but may come with origination fees. As with balance transfer cards, it makes sense only if you can get a better interest rate.
- Cash-out refinance. If you’re a homeowner, you may be able to refinance your mortgage at a lower rate, take out more money than you owe, and use the balance to pay off your debts. The risk of a cash-out refi, though, is the chance that you could lose your home if you default.
7. Settle for less than you owe now
It may seem impossible to determine how to get out of debt if you owe more than $10,000 in unsecured debt, are falling behind on your payments, and experiencing a financial hardship (such as a death in the family or job loss), but there is an option: debt settlement. Also called debt relief, debt settlement is a process where a company working on your behalf (such as Freedom Debt Relief) negotiates with your creditors to lower the amount owed, considering it paid in full once the settled amount is paid off.
While you can do it yourself, you may get better results by working with a debt settlement company that has the experience and relationships needed to negotiate effectively with creditors. For example, Freedom Debt Relief has been negotiating with hundreds of creditors since 2002. It’s important to know that reputable debt relief companies don’t charge upfront settlement fees, instead collecting a percentage of the total debt enrolled as their payment once the settlement has been reached.
Generally, when you enroll in a debt relief program, the process works like this:
- You stop making your monthly payments to creditors.
- You deposit funds that otherwise would go to your creditors into a bank account you control.
- Once you have enough money in your account, you or the company working on your behalf negotiates with creditors to lower the amount you owe.
- Once you have agreed to the settlement terms, funds are processed from the bank account you’ve been saving into to pay a fee to the debt settlement company and the negotiated settlement amount to the creditor.
Know when to ask for help getting out of debt
If you’re confident that you know how to get out of debt on your own, then you’ll want to get started on your plan right away. However, you may need some help reaching your financial goals. Freedom Debt Relief can help you understand your options for getting out of debt, including our debt relief program. Our Certified Debt Consultants are experts in consumer debt and can help you find the solution that fits your needs. Find out if you qualify.