How to Get Out of Debt: A Step-by-Step Guide for 2019
We all know the basic principles of how to get out of debt.
Whether you’re broke and have no money, a low income or bad credit, the steps are all the same. Spend less than you make and put any extra cash towards paying off your debt.
In practice, though, organizing what you need to tackle first, and knowing how to get started, can be overwhelming.
It can leave you feeling trapped and prevent you from getting started altogether.
To help you on your way to financial freedom, we’ve put together this simple, step-by-step guide to help you build a debt payoff plan and eliminate your debt. It doesn’t matter if you have no money or your income is low. Even with bad credit, you can still put this step-by-step debt payoff guide to good use.
Let’s walk through the steps and help you get out of debt once and for all!
Step 1: Find Out How Much Debt You Owe
You can’t develop a debt payment strategy until you know exactly what you’re up against.
It’s time to mentally gather up all your debts – from that $40 store credit card balance to your $30,000 car loan – and put it all in one place.
Write down the debts you have, how much you owe on each, the interest rate, and the minimum payment.
If you aren’t sure on the interest rate, take the time to open your accounts and find the exact number. High-interest rate debt is a bigger drag on your success than low-interest debt, so you need to know which is which.
Totaling it all up in black-and-white may be scary, but you’re getting ready to cut that number down! Promise yourself that is the highest your debt number will ever be.
Now, let’s get to work.
Step 2: Choose Your Approach: Debt Snowball vs. Debt Avalanche
Once know exactly how much you owe, it’s time to put a plan together for how you’re going to get out of debt.
Throwing money at a different debt every month, without tracking your progress, is a surefire way for burnout. You’ll feel like you’re spinning your wheels and give up too soon.
This gives you milestones to celebrate, motivates you to keep going, and keeps you organized along the way.
So the question is, how do you decide which debt to pay off first?
There are two main philosophies when it comes to making this choice, the “Debt Snowball Method” and the “Debt Avalanche Method.”
Debt Snowball Method
Remember making snowmen as a kid? You would start with a small snowball, then roll it along the ground, picking up more snow until you had a massive snowman belly. That’s the concept behind the debt snowball.
With the debt snowball, you start by paying off your debt with the smallest balance, regardless of interest rate. While you pay off that debt, you make minimum payments on all the others.
Why is it called the debt snowball? Because the amount you put towards principle (your balance) snowballs every month. You keep putting the same amount of money towards your debts, even as you pay each one off, increasing the amount that goes towards principal over interest.
Debt Avalanche Method
The methodology of the debt avalanche is similar to the debt snowball, except with this method your goal is to minimize interest costs. No extra profits for those greedy creditors from you!
With the debt avalanche, you start by paying off the debt with the highest interest rate, regardless of size. Then move on to the debt with the next highest interest rate.
Why an avalanche instead of a snowball? Because, by eliminating high-interest costs first, you put more of your cash towards actual principal over time. This means getting out of debt somewhat faster (and cheaper).
Decide Which Debt You Will Tackle First
What’s more important to you? Getting quick, early wins by paying off small debts, or paying the least amount of interest?
Both the snowball and avalanche methods have their benefits. And while the debt snowball isn’t mathematically the cheapest way out of debt, it is one of the most effective. Pursuing a debt-free life can be a long process, depending on where you are starting, and paying off a few debts early on can really get you excited to keep going.
Step 3: Make Some Big Changes
While small, day-to-day changes matter, a few big changes can fast track you to getting out of debt. Consider these ideas and decide whether the expense they represent is truly worth it to you.
Step 4: Create a Monthly Budget
Want to know how much you can put towards debt each month? You’re going to need a budget.
A reasonable budget helps you understand where your money is going. It alerts you to where cash is leaking out to things that don’t really matter to you. And it clues you in on how much you can afford for the things you do want.
By building a budget thoughtfully and allowing yourself some flexibility, you can reduce money stress by knowing there is always money in the bank for the things you need.
How to Make a Budget
Before you dive in, remember one thing: the budget you create today is not set in stone.
Your categories, spending, and habits will change over the first few months. And that is perfectly fine! It will take time to adjust to tracking your expenses and creating awareness of your needs.
How to start a budget in five simple steps:
If you have very little money left over after Step 4, you may need to review your core and regular expenses. Without big lifestyle changes you may be stuck treading water, finding it difficult to ever fully get out of debt.
As you get accustomed to your budget, don’t be afraid to shift money from one category to another. There is no such thing as a normal month. Don’t go on a spending splurge and completely fall off the tracks just because you didn’t accurately predict the cost of a house repair.
Use Trim to Lower Your Monthly Bills
Want to cut your bills without ever having to talk to a company ever again? Trim has your back.
Trim is one of our favorite money-saving tools. The free app sends you updates on your spending via text, finds unwanted subscriptions and cancels them for you, and can also negotiate your cable or internet bill (seriously).
Step 5: Lower Your Interest Rates to Save Money
The less interest you can pay to your creditors, the faster you’ll be able to escape your debt. Check out these top ways to lower your interest rates.
Step 6: Improve Your Spending Habits
Embracing a frugal mindset will reduce your spending and allow you to pursue your goals more effectively. Not sure where to cut? Start with the big stuff.
Save Money on Food Each Month
The average American spends 10% of their budget on food, one of the most significant categories after housing. We have to eat, but do we have to pay so much doing it? Here’s how you can cut.
Stop Eating Out
Not only is eating at a restaurant more expensive, but it is also harder on your waistline. Meals at restaurants cost more and include larger portion sizes and more fat than the average dinner cooked at home.
Over 4% of the American budget (so 40% of total food spending) goes to food away from home. Eliminate dining out from your budget, at least until you are debt-free.
Avoid Impulse Buys in the Grocery Store
Before heading to your weekly grocery store shop, take the time to make a list. Check your grocery store’s online circular and review Ibotta, a free app that gives you cash rebates on grocery store purchases, to see what’s on sale. Then, build a meal plan and list around those items.
Once you’re in the grocery store, stick to your list! To avoid extra purchases motivated by hunger, have a snack before heading to the store.
Learn How to Say “No”
Nights out on the town, drinks with coworkers, and shopping trips with friends are tempting. But when it doesn’t fit in your budget, you’re sacrificing your future for a little fun today.
Don’t be afraid to say “no” to any event you can’t afford. You don’t have to isolate yourself in your debt-free journey, just be willing to offer an alternative. Suggesting a game night or potluck at your place could mean more quality time with your friends for a lot less money.
Give Up Your Expensive Hobbies
Spending $100 a month on yoga classes just isn’t realistic when you’re hustling to get out of debt. Trade in your expensive hobbies for lower cost options like free YouTube classes or a monthly book club.
Step 7: Increase Your Income
Frugal living is powerful, but it has a limit. You can’t save more than you make. So, to take your debt-free journey to the next level, it’s time to bring in some more dough.
Ask for a Raise
If you’ve been working hard and providing value to your company, it never hurts toask for a raise.
Don’t just drop the request in your manager’s lap though. Ask for feedback, develop your skills and take on more responsibility. Along the way, proactively let your superiors know what you’ve accomplished. You want your manager to know you deserve a raise before you even walk through the door!
Start a Side Hustle
Commit a few spare hours in your week to something your good at or a task you enjoy to make money from home. Since the average person watches five hours of TV a day, I’m willing to bet you can make the time. Start from your couch today by taking surveys online with Swagbucks or Survey Junkie, or by reviewing websites with User Testing.
Start a Low-Overhead Online Business
The internet has made it easier than ever to start a business with close to zero up-front costs. Set up shop as a freelance writer, proofreader, or virtual assistant, and offer your services to other companies who want outside help with hiring a permanent employee. You can work as many or as few hours as you want, with some people turning their businesses into six-figure full-time jobs.
Get your first clients by reaching out to local businesses, posting about your new business on Facebook and LinkedIn, or listing your services on UpWork.
Putting it All Together
Whether you’re broke and have no money, you’re living on a low income or you have bad credit, just stick to these steps to become debt free once and for all.
Once you have an action plan for how to get out of debt, achieving debt freedom just requires time. Stay focused on your goal, stick to a budget, trim fat from your spending, and find ways to bring in more income to speed up your journey. Just don’t forget to celebrate all the little wins along the way!
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