Americans have way too much debt; we do as a country and many of us do as individuals. Debt has become a plague that won’t go away. Many want debt relief but are in over their heads and have no idea how to get out of debt.
Some people have a handful of credit cards and carry balances on all of them. They may pay over 20% APR on their balances and struggle to pay them off.
Many individuals resort to only making minimum payments, which ensures that the debt will be around for years, costing thousands and thousands of dollars in interest.
Signs that you may be in over your head and really need to get out of debt may include the following:
- You have no emergency fund
- You are having difficulty paying your monthly expenses
- You are being contacted by collection agencies.
- You are only making minimum monthly payments
How to Get Out of Debt
So what is the best way to get out of debt? Most people can achieve debt relief by creating a responsible debt elimination plan and sticking to it. It may not be fun or convenient, but such a plan can help most people get out of debt. Such a plan may entail the following:
1. Make a commitment that you will get out of debt and never incur debt ever again.
2. Change the attitude and behaviours that got you into debt in the first place. Make a resolve to never buy things you can’t pay for immediately ever again.
3. Don’t acquire any new debt. Don’t open up any more credit cards or take out any more loans. Perform plastic surgery on your credit cards if necessary.
4. Develop a budget to help you live frugally and stick to it. Plan and save for future expenses so that you don’t have to go into debt every time a large expense arises. Open a new online savings account for each savings goal so you can track your progress and don’t spend the money on something else.
5. Ask your creditors for help. Let them know that you are having problems making your payments but that you are working to get out of debt. Since they would rather make some money off of you rather than no money at all, they will often times work with you. Ask them to lower your interest rate, match the offer you have seen for a low interest credit card, or give you more time to make your payments.
6. If your credit card company won’t help you, consider taking the following actions if they are appropriate for you:
- If you have decent credit, consider transferring your balances to a low interest rate credit card. However, watch out for low introductory rates that later convert into much higher rates and factor in any balance transfer fees.
- Consider rolling your debts into a long term loan. For example, you might be able to roll your credit card debt into a tax advantaged, low interest home equity loan. However, remember that not paying off your credit cards can damage your credit score, but not making your loan payments can cause you to lose your home.
7. Snowball Debt Repayment Method
- Create a spreadsheet with each of your credit cards and other debts, its outstanding balance, interest rate, and minimum payment.
- Order your debts by interest rate, so that the one with the highest rate is at the top of the page and the liability with the lowest interest rate is at the bottom.
- Sum up the minimum payments that you must make each month.
- Review your budget to see how much money you can realistically use to pay off your debts each month after meeting all of your minimum payments and other living expenses.
- Make the minimum payment on each of your debts, then apply whatever extra money you computed above towards a basic emergency fund. Aim for $1,000 – $2,000. Keep this money in a separate online savings account and only use it for emergencies. If you don’t have an emergency fund and unexpected expenses arise, you may be unable to meet your debt obligations. Once you are debt free, you can increase the size of your emergency fund.
- Once you have an emergency fund, continue to make the minimum payment on each of your debts and expenses except for your most expensive liability (the one at the top of your spreadsheet). Apply whatever extra money you earn each month to this debt. Paying off your most expensive debts first will save you money over the long run.
- Each month, update your spreadsheet to reflect your shrinking debts and the progress you are making.
- Repeat these steps until the liability at the top of your list has been paid off. Continue to make the minimum payments on all your debts and expenses, but now use any extra funds you may have to pay off the second debt on your list (the most expensive debt now that the first debt on the list has been paid off).
- Repeat until all your debts have been paid off
Some people prefer to attack their smallest debts first, rather than their most expensive debts. You will pay more in interest and it will take longer to get out of debt, but if this works better for you, then go for it.
As you pay down your debts, you have more and more money with which to attack your remaining debts. Your payments continue to snowball until all of your liabilities are paid off.
Achieving Debt Relief Even Faster
There are a number of ways to generate extra cash, which can be used to pay down debt.
- Find ways to reduce your expenses
- Sell stuff you don’t need on Amazon or Craigslist
- Find ways to boost your income
- Do some tax planning to pay yourself more and Uncle Sam less
- Shop around for lower insurance rates
- Get free cash back with each purchase using Upromise, Mr. Rebates, and a Cash Back Rewards Credit Card (but only if you don’t carry a balance!!).
- If appropriate, consider refinancing your mortgage to take advantage of lower interest rates
Many people are able to get out of debt on their own by creating an appropriate debt elimination plan and sticking to it. However, if you need or prefer professional assistance, seek out a qualified financial advisor to help you.
For additional reading on how to get out of debt, consider reading the following books:
- The Total Money Makeover: A Proven Plan for Financial Fitness
- How to Get Out of Debt, Stay Out of Debt, and Live Prosperously
- Debt Free by 30: Practical Advice for Young, Broke, & Upwardly Mobile
What are your thoughts on how to get out of debt? What has and hasn’t worked for you? Leave a comment below!