If you want to learn how to get out of debt, don't worry, you can do it. Yes, Getting out of debt isn't impossible. Like any big goals, all that it takes is an action plan to identify where you are and create a plan to zero out your debt.
Identifying All of Your Debts
The first part of paying off your debt is getting a complete picture what you owe. When you have everything written out in front of you, it makes it much easier to create an action plan. Depending on how much you owe, it might also help you realize it's not as bad you might have originally thought. Here's how you can get started identifying your debts:
1. Own Your Debt
Before you start identifying all of your debts, take a moment to process that you have debt but want to get out of debt. Forgive yourself for any past mistakes, missed payments, or overspending. It might be painful to accept how much debt you have at first but you must own it.
2. Make a Debt Tracker
It's astonishing how few of people ever created a tracker to understand their total debts. Most likely, it comes from not wanting to accept the guilt of having debt; but if avoided, it can make it nearly impossible to get out of debt. Open up a new Google or Microsoft excel sheet and list out all of your debts. Start with the name of the creditor, interest rates, total balance, loan term length (if any) and the minimum amount due each payment. This will include student loan, credit card, and any other type of debt owed.
3. Get Your Debt Number
Once you've made your debt tracker and taken the other steps, identify your total payoff number. This is crucial as you will have a starting point and a clear goal that you are trying to achieve.
How to Prioritize Your Debts
All debt is not created equal. It's so important to understand there are different types of debt.
1. Understand Bad Debts and Good Debts
Bad debts are usually paying for things you want instead of always need. While there might be some emergencies that max out your credit cards, often times it's excessive spending. There are three main types of bad debt:
- Credit Card Debt: The average American household owes over $16,000 in credit card debt!
- Auto Loan Debt: According to CNBC , the average auto loan in the US is $30,032!
- Consumer Loan Debt: Consumer loan debt isn't as common as credit card and auto loan debt, but still considered bad as interest rates are usually between 10-28% interest fees!
Good debt is identified as investments in your future. Here are three common types of good debt:
- Student Loan Debt
- Mortgage Loan
- Business Loans
2. Decide What Debt to Pay Off First
Once you know each type of debt and interest rates, you can begin to pay off debt quickly! Focus on paying off bad debt first, regardless if it is a credit card or auto loan. Start by paying off the loan with the highest interest rate first. If you have several credit cards with different interest rates, you want to focus on the one with a higher APR. You will actually save more money by eliminating the card with the highest interest rate.
3. Don't Pay the Minimum Amount
Paying the minimum amount digs you into a hole as interest rates will offset your payment. Even a small amount more than the minimum can help you pay off debt much faster.
Remove Obstacles to Pay Off Debt Quickly
Creating a debt tracker and prioritizing a plan is simple but avoiding temptation can be difficult.
1. Set a Reminder to Track Your Debt
"If you can't measure it you can't manage it." - Peter Drucker
It's so important to track your debt to ensure that you get it paid off quickly. Similar to working out and measuring your results, you need to track your debt constantly. Start with a weekly reminder where you sign on and log your updated number. Did you increase, decrease or stay the same? Regularly tracking your student loan balance can be incredibly motivating as well. You will get a huge confidence boost each time you see your total debt amount decreases.
Set weekly and monthly goals so you can have short term wins and keep the momentum going.
2. Hide Your Credit Cards
If your biggest debt is credit cards, you need to eliminate temptation and remove them from your wallet. Some people have gone to extreme measures and even freeze their credit cards. Why? This would create an ice block around your card which would require you to chip away it slowly. This will give you time to think if it's the best idea or leave them alone until the debt is paid off.
3. Automate Everything
Willpower can be a huge downfall to being able to get out of debt. By automating your bills each month, you will ensure that willpower isn't involved.
4. Plan Ahead
Getting out of debt will require some sacrifices but with enough planning, you can make it work. For example, if you know that you have a friend's birthday or family dinner upcoming, plan ahead for the costs. Whether you need to cut back on spending the week previous, pick up a side job or meet them after dinner do what is needed.
5. Live Cheaply
The only way to get out of debt is to make some sacrifices on your spending habits. Find ways to save money each month so you can apply that amount to your outstanding debts. Here are some ways to save money each month:
- Live with roommates
- Cook dinners and prepare lunches for work instead of eating out.
- Cut cable and choose Netflix or Amazon Prime
- Take public transit or bike to work
Find the Lowest Interest Rates
The higher your interest rates, the harder (and longer) it will take you to get out of debt. If possible, you want to find ways to lower your interest rates to help get out of debt quickly. Here's how you can get started:
1. Maintain a High Credit Score
Your credit score will have a large impact on your ability to refinance your loans and receive a lower interest rate. If you have a low credit score, it's unlikely you will be able to refinance your loans. Use these credit tips to increase and maintain an excellent score:
- Never miss a payment
- Don't exceed 30% of your credit limit
- Don't sign up for more than one card at once
- Limit hard inquires like auto-loans and new credit cards
- Monitor frequently with free credit tracking software
2. Find Balance Transfer Offers
Start by opening a free account on credit.com. Credit.com offers you to open a free account and see what type of balance transfer offers you can receive. Some of your existing credit cards might already have 0% or lower APR balance transfer offers available. Contact each of your credit card providers to ask about lowering your rate for a one-time balance transfer offer. If you do take advantage of this option, make sure that you use a balance transfer and not a cash advance. Cash advances have a ton of high interest fees (15-25%, depending on your credit card) and will only compound your debt problem.
How to Get Rid of Debt Forever
Setting up a plan, removing temptations, and getting the lowest interest rates is the first step to get out of debt.
1. Keep Monitoring and Adjusting
Once you have a plan, don't get comfortable. Track your debt payoff plan and make the necessary adjustments when needed. Monitor your credit scores with a free site like CreditKarma. The higher your credit score climbs, the more likely you will be to secure a new, lower-interest loan.
2. Earn More Money
There are only so many ways to save money. Instead of clipping another coupon or making sacrifices for your morning coffee, find ways to earn more money! Think about it, it is much easier to find ways to earn an extra $1,000 per month than find $1,000 to cut from your budget. Here are some examples of ways to earn more money:
- Have a conversation with your boss about current salary and/or commission rates. If you're not satisfied or want a change, don't be afraid to look around at other positions. Some of them might even have a student loan debt reimbursement plan!
- Start a side hustle. This could be coaching students on the weekends, driving for Uber or taking paid online surveys. There are tons of ways to make money outside your 9-5. Now that you have a clear plan to pay off your debts, you'll be more motivated than ever to figure out creative new ways to earn money.
- Create an online business. There are so many websites and blogs that earn money from ads, affiliates and other online products.
3. Celebrate Your Wins
As you progress in your debt payoff journey, don't forget to
celebrate your wins. You need to always reward yourself for the hard work and discipline that is required to get out of debt. While you shouldn't celebrate so big that it increases debt, make sure to factor in little rewards to keep you motivated.
4. Set New Financial Goals
Eventually, with a plan and these steps, you can get out of debt. Once you do, make sure to celebrate your monumental achievement but don't stop there. Now, you can focus on acquiring wealth and increasing your net worth. Set new financial goals so you have a new target to aim toward. Here's
how to set financial goals and actually meet them. These could be anything now that you are debt free! Think about where you want to travel, buying your first home or saving for your future retirement. Just like before, make sure that your goals are specific, measurable, and achievable.
Conclusion
Congrats, you can now set a plan in motion to finally get out of debt quickly (and hopefully forever)! Remember if you want to get out of debt quickly, it's not always easy. Just like any big goal, there will be sacrifices, challenges, and problems to overcome.
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