5 Steps to Get Debt-Free Fast

5 Steps to Get Debt-Free Fast
Key Takeaways:
  • For most people, “debt-free” means not carrying unsecured debt, or not having any debt except their mortgage.
  • It takes planning to balance savings with debt repayment.
  • Becoming debt-free can improve your emotional and physical health.

For most people, debt-free living means not having any debt other than, perhaps, a mortgage. Studies show that debt-free living reduces stress and improves your physical and mental health. It takes careful budgeting to balance necessary expenses, pay off debt, and save money. 

This article will describe five steps you can take to get debt-free faster so you can start to enjoy the benefits now and in the future.

Why Is Being Debt-Free a Good Goal to Have?

Many Americans routinely carry debt throughout their adult lifetimes, so is getting debt-free that important? 

Getting out from under your debts improves your finances in the long run and has mental health benefits. 

In terms of the impact on your finances, think of the interest you pay on your debt. Paying interest means that for every dollar you spend, some portion of that dollar goes to banks or credit card companies instead of the things you want and need.

Worse, the financial impact of debt snowballs. The more debt you have, the longer it takes to repay. So you pay more interest. Also, the higher your balances, the lower your credit rating is likely to be. That means you’re likely to pay higher interest rates on your debt.

In short, higher debt means less money for you and your family. That’s because more goes to pay interest to your creditors. 

Getting debt-free means taking control over where your money goes. 

As for the mental health benefits of getting debt-free, several academic studies show a relationship between debt and emotional distress. One study found that people with debt were about three times as likely as those without to have common mental disorders. 

The percentage of people with debt who had common mental disorders was higher than all other groups measured by the study, including people who had lost a spouse due to divorce, separation, or death, and unemployed people.

They say that money can’t buy happiness. However, getting debt-free can improve your finances and state of mind. 

Secured vs. Unsecured Debt

So what does getting debt-free mean? To be clear on what you should shoot for, it helps distinguish between secured and unsecured debt. 

Secured debt is a loan that uses some of your property as collateral. Mortgages and car loans are typical examples of secured debt. If you don’t pay your loan, the lender can repossess the house or the car securing that loan.

Collateral provides an obvious advantage for the lender, but it can also help you:

  • Because the loan has collateral, lenders tend to charge lower interest rates on secured debt. That makes it cheaper for you than other forms of debt.

  • If you use a secured loan to buy something with long-term value, like a house or a car, the debt is offset by an asset. In terms of your net worth, that’s a wash. However, if you simply use your credit card for a vacation or a night on the town, you’re taking on debt without an offsetting asset. That harms your net worth.

That’s why many personal finance consultants equate a “debt-free” goal with eliminating unsecured debt. 

How to Get Debt-Free Faster

If you can’t make your payments, you need to pursue debt relief options immediately. However, even keeping up with your expenses isn’t enough to get you out of debt quickly. In fact, it means you’re playing the lender’s game.

Lenders want to get their money back eventually, but they want to string your repayment over a long time, so you pay more interest. That means they win.

If you get debt-free faster, you pay less interest. That means you win. 

The sections that follow show five ways you can do that.

1. Negotiate Better Debt Terms

One way to ease your debt burden is to negotiate better debt terms with your creditors. There are a few ways you can do this:

  • Get a lower interest rate. If you have a good payment history, you may qualify for a better interest rate on a credit card. For longer-term debt like a mortgage, refinancing is a more likely path to lowering your interest rate.

  • Ask for more forgiving repayment terms. Only attempt this if you are having trouble paying your bills. Lower payments or more time before you have to repay your debt will likely cost you more in the long run. But if you’re in trouble, smaller payments may help you avoid defaulting on your loans.

  • Pursue debt settlement. This means negotiating a reduction in the amount you owe. Debt settlement is a drastic solution; consider it only when you can’t find a way to repay your debts in full. The consequences can include damage to your credit history and added tax liability. 

2. Organize Your Debt Repayment Strategy

Even if you aren’t having trouble paying the bills, you could still benefit from organizing your debt repayment.

Some people prefer to pay off the largest balances first. Others start with the smallest. Going by size isn’t the most cost-effective or fastest way to pay down debt, but getting rid of that first debt quickly can be highly motivational.

The best way to organize your debt repayment is to list your accounts by interest rate from highest to lowest. Then, put all extra money toward paying the debt with the highest rate while making the minimum payments on the other accounts.

This way, you’ll pay down the most expensive debt first. As a result, you’ll pay less interest and eventually have more money available to eliminate your debt faster. 

3. Benefit from Debt Consolidation

Another benefit of prioritizing your debt by interest rate is finding debt consolidation opportunities. 

Debt consolidation means transferring multiple debts into a single account. This is helpful because it makes your debt easier to manage. But you benefit much more if you can trade high-interest debt for lower interest debt. 

Look for the most expensive debt on your list and see if you can find ways to pay it off with a cheaper loan. 

Some possible ways to do this include: 

  • Using a cash-out refinance mortgage or a home equity loan to pay off higher-interest debt

  • Taking a personal loan to pay off high-interest credit card debt 

  • Finding credit card balance transfer offers that give you a temporary break from paying interest while you pay off credit card debt

4. Find Extra Cash for Debt Repayment

In addition to minimizing interest expense, you should manage your resources to find more money for debt repayment.

Here are some possibilities:

  • If you get a tax refund check, put it towards your debt.

  • Similarly, if your employer pays you a bonus, use it to reduce your balances.

  • Every time you get a raise, direct at least half the additional amount in each paycheck towards debt repayment.

  • Make a budget that focuses on the essentials and debt repayment first.

  • Sell stuff you don’t need to raise cash for debt reduction and declutter your house.

5. Balance Savings with Debt Repayment

One of the dilemmas people face as they try to pay down debt is how to balance savings with debt repayment. Both are important, so which should come first?

In general, paying down debt should come first. Interest on savings and returns on investments often can’t compete with high-interest debt. 

Also, paying off debt helps prepare you for retirement. When planning for retirement, it’s essential to subtract your debt from savings because looking at savings alone can give you a false sense of security. 

There are some exceptions, though. You may want to favor savings over debt repayment in the following situations:

  • Where low-interest debt like a mortgage is concerned

  • To build an emergency fund, because having to borrow on short notice can be especially expensive

  • When saving would earn you an employer match on retirement plan contributions (free money)

Motivation to Get Debt-Free Fast

So why should you be motivated to get debt-free fast? Here are some excellent reasons:

  • Gain more favorable access to credit. You can’t always avoid borrowing, but you want the lowest interest rates possible when you do. Having less debt will likely qualify you for more favorable rates the next time you borrow. 

  • Avoid long-term consequences of bankruptcy or blemishes on your credit history. If your debt gets out of control, borrowing money will be expensive and difficult (if you can borrow at all).

  • Leave more income for the things you want. Pay less to your creditors and more to yourself. When you lower your debt, you reduce your interest expense.

  • Function better. As noted earlier, debt is often associated with depression and other disorders. On the flip side, a study published in the Proceedings of the National Academy of Science of the United States found that cognitive functioning increased once people got debt relief

  • Retire sooner. It’s difficult to retire if you’re still maintaining lots of debt. You’ll also save for retirement faster once you’re paying less of your income in interest. 

  • Sleep better. Less stress should mean you can sleep more soundly. Do you need a better reason than that?

With so many great reasons to get debt-free, why not take the first step now?