How to Get Out of Debt, Fast! A Step-by-Step Guide
Debt. A four-letter word no one wants to hear, let alone deal with. It’s easier and faster than you can imagine to get in over your head. While debt comes with a stigma of overspending, financial irresponsibility isn’t always the only thing that leads to debt. Major life events, like job loss, major medical illness, divorce, or death of a spouse can all lead to debt as well.
Here’s the good news. You can get out of debt. It takes some planning, dedication, and patience, but it’s doable. Here’s a detailed guide of the basic steps you can take to get out of debt for good.
1) Get your finances on the right track.
You might be surprised to see that the first step getting out of debt doesn’t really involve your debt at all. Instead, the first step is to get your finances in a good place so you can start working on your debt.
You see, your spending habits are directly tied to your ability to pay off debt. Failing to correct bad spending habits, will make it difficult and even impossible to pay off your debt.
2) Create a budget
Start by creating a monthly budget that you’ll use to plan and guide your spending. To create a budget, first, total all your sources of monthly income. Then, list and total the expenses you pay each month. Subtract your total expenses from your income to see what’s left. That’s your net income.
If your net income is negative, it means you’re spending more than your monthly income. You’ll have to at least cut back enough to be able to afford your monthly expenses. Ideally, you should have a positive net income – enough extra money left so you can put it toward paying off your debt.
3) Start an emergency fund
An emergency fund will keep you from having to borrow money or use your credit card for small expenses that come up from time to time. While the ideal emergency fund would be enough to cover three to six months of living expenses, you can start working toward a savings of $500 or $1,000 then build over time.
4) Fix any bad spending habits
Identify and work to correct any bad spending habits you have. These spending habits will drive you back into debt if you don’t correct them right away. Pay attention to how and when you spend money to get more insight into what drives you to spend. Using an expense tracking app can help.
5) Total up your outstanding debt
The first time you face your debt can be sobering, especially if you’ve spent months or even years completely ignorant of the amount of debt you’re carrying. This step can be difficult, but it’s crucial.
Use your billing statements, bank statements, and your credit report to count up the total amount of debt you’re carrying. Include credit cards, loans, debt collections, family loans, and medical bills. You can include your mortgage if you plan to pay it off along with the rest of your debt. Or you can exclude it for now, then aggressively pay it off once you’ve paid off your consumer debt.
Include some details about each debt: the creditor or lender, total balance due, monthly payment, and interest rate. Add up your debt balances to determine the total amount of debt you owe.
6) Figure out how much you can put towards your debt
The budget you created in Step One is critical in this step. To really make an impact on your debt, you’ll have to pay more than the minimum on all your accounts. You can get out of debt faster, if you put as much as you can toward your debt as often as you can until it’s all paid off.
Your net income – the amount left over you’ve covered all your bills and expenses – is the amount you can afford to put toward your debt each month. Make sure your budget is accurate so your debt pay off plan is also accurate.
While you’ll primarily rely on your income to pay off your debt, you should also pay more toward your debt as often as you can. For example, tax refunds, a bonus from your job, or overtime pay are all prime opportunities to pay more on your debt.
7) Put together a debt payoff plan
With a budget, a list of your debts, and an idea of what you can pay toward your debts each month, you have all the ingredients you need to create a debt payoff plan.
Your plan can be as simple or detailed as you need to keep you on track. For example, a basic debt payoff plan should prioritize your debts, listing the order you’ll pay them off, and the amount you’re going to pay off each month.
You can make your plan more detailed by listing each debt along with the month you’ll pay toward each debt during the month. You can also use a spreadsheet software to calculate the changes to your balance and predict a debt payoff balance.
The most effective way to pay off your debt is to pay a large, lump-sum amount to one debt each month and make the minimum payment on all the other debts. Then, once the first debt is paid off, you’ll move to the next one on your list and continue until all your debts are paid off. This is more efficient than spreading larger payments around to all your debts.
You can prioritize your debt based on:
- Amount, paying off the smallest balance first. This allows you to pay off some smaller balance debts faster, giving you motivation to keep going.
- Interest rate, paying off the highest interest rate balance first. This usually allows you to save more money on interest in the long run, but can take a few months longer depending on your balances.
- Any order you choose. Seriously, you can pay off debts in any order that will keep you motivated. The key is to pay one at a time.
Once you’ve created a plan, the next step is to start making monthly payments on your debt. Commitment and consistency are key to making progress. If you’ve calculated your debt payoff time, then you already have an idea of the amount of time it will take to take to become completely debt free. Tracking your progress and celebrating milestones along the way will help keep you motivated to continue paying off debt.
Staying on Track With Your Debt Plan
Creating more debt while you’re trying to get out of debt would be counterproductive. Put your credit cards away or close the accounts so you’re not tempted to use them once you free up some available credit.
Life isn’t perfect and your debt payoff journey may not be perfect either. You may have some setbacks due to changes in your family and finances. Revisit your budget and your debt payoff plan to get back on track. It’s ok if you have to make tweaks, just be sure you continue to make progress no matter what.