Chances are, you have some debt. As of 2020, Experian’s Consumer Debt Study reports the average American’s personal debt is $90,460 with total consumer debt in the US at $14.1 trillion; be it student loans, credit card debt, car loans, a mortgage or medical debt. You may have borrowed to achieve an important goal—such as a college education or homeownership—or to cope with an emergency, or even just to splurge. Now you’ve decided to cut down and pay off that debt. How do you get out of debt? Here are the rules of the road … and a checklist to get you started on your debt management journey.
Rules of the Road to Being Debt-Free
❏ Accept that the path will feel uncomfortable (at least sometimes). Facing the reality of your situation may arouse feelings of shame over past purchases or frustration at the high cost of education or medical care. Try to avoid these feelings; they may lead you to slip into “financial denial” and make even more unwise choices, such as not sticking to a budget. If confronting your debt stresses you out, consider a free or low-cost credit counseling service. Just make sure it’s accredited by either the National Foundation for Credit Counseling or the Financial Counseling Association of America.
❏ Rip up your current budget. You need a new budget that will get you where you want to go. Be sure to include buckets for debt repayment based on each kind of debt, prioritizing the ones with the highest interest rates and most recently incurred debts, and, if you don’t already have one, an emergency fund so you can avoid incurring new debt. While it may seem counterintuitive to continue to save money, it’s best to have savings on hand while you’re trying to become debt free.
❏ Don’t sacrifice your retirement. Along the lines of creating a new budget, redirecting your retirement savings to paying your debt is a no-win situation. If you stop contributing to a retirement account, you lose out on the returns and, eventually, the compound interest those contributions earn. You may also miss out on employer-matching funds. If you borrow money from your 401(k) to repay your debt, you will owe taxes, a penalty and possibly state taxes, too.
❏ Remain flexible. Check in with yourself regularly. Are you sticking to your new budget? If not, identify the cause and consider revising the budget, if necessary. You may also need to adjust based on what types of debt you have, and which debt repayments are most urgent. For a budget to help you, it has to be realistic.
❏ Earn more. If your budget leaves no room for debt repayments, look for ways to increase your income. A second job, a side hustle or even a yard sale are all options. Dedicate all your extra money to paying down your debt.
How to Get Out of Debt
❏ List your debts—and don’t try to pay everything off at once. This step may bring about some uncomfortable feelings, but keep in mind that paying off debt will take time. Start with a complete inventory of your debts: You’ll need to know the balance owed, minimum payment, interest rate and payment due date. Next, prioritize your debts based on your primary goal. If you want to minimize your total costs, pay off your high-interest debts first. If you need a psychological boost to keep you committed to your plan, pay off the smallest balance first to gain a sense of accomplishment. Just be sure you’re making the minimum payments on all your debts every month to avoid late fees.
❏ Focus on behaviors, not motivation or willpower. Most people believe motivation is the key to change. But motivation is notoriously unreliable, according to Stanford-trained behavior scientist BJ Fogg. In his new book, Tiny Habits: The Small Changes That Change Everything, Fogg describes how your motivation fluctuates and often has competing elements. For example, perhaps you want the latest shoes from your favorite brand, but also want to get out of debt. If you rely solely on willpower to resist the urge to buy, you’ll find yourself fighting a constant internal war. Instead, Fogg suggests, make it more challenging to perform the actions you want to avoid. You could use a browser plug-in to block your favorite shopping websites, or meet friends for coffee rather than take a trip to the mall.
❏ If you can afford to, consider extra payments. Check your budget to see if you can free up more of your disposable income to increase your required minimum payments. Over time, this will reduce the total interest paid and you’ll finish the debt repayment faster.
❏ Ask for lower rates on credit cards. You won’t always succeed with this request; sometimes the credit card company will say no. That’s okay. The call doesn’t take much time, and if you do get a lower rate, those few minutes on the phone could save you hundreds of dollars.
❏ Automate your payments. Set up automated payments for all your bills, including your debts, so you always avoid late fees. Consider your budget strategy when allocating how much money you’ll be putting towards each piece of debt (if you plan on paying more than the minimum payment). You can also set up automated transfers into your savings account to bolster your emergency fund and reduce the temptation to spend.
❏ Balance transfer to a new card. Some credit card companies will let you transfer credit card debt from one credit card to another as a method of acquiring new customers. You could also get a promotional APR for a period of time where no/low interest is charged. You’ll still have to make minimum payments and you should try to pay more if you can, but it could offer some relief. You’ll likely need a good credit score and a history of making payments to qualify.
❏ Consider debt consolidation (but be aware of potential pitfalls). If you consolidate your credit card debt, you can lower your interest rate and total monthly payments without hurting your credit score. While that sounds like a solid plan, be aware that consolidation might tempt you to start spending again, leaving you in no better a position—and possibly even worse off—than when you started. Pair your consolidation with a financial management plan and stick with it. And know that if you consolidate student loan debt, you may lose benefits, such as the option to defer payments or eligibility for public service forgiveness programs. And keep in mind you may need a good credit score to qualify.
❏ Dedicate windfalls—no matter how small—to debt payment. Got a bonus at work? A birthday check from your grandma? Found $10 in your winter coat? Devote it to debt repayment—and do it immediately, so you don’t splurge.
Regardless of why you borrowed money, tackling debt can be a process that takes time. Remember your long-term personal finance goals and what keeps you motivated. No matter what your answer is, debt repayment is a step towards that future. Start with these steps and remember that you can always do any step more than once.
Elizabeth Whalen is a freelance writer based in Seattle. She loves writing about business, financial services and sustainability.
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