Does your debt worry you? A survey conducted by Capital One reported “77 percent of Americans are anxious about their financial situation,” while “58 percent feel their finances control their lives.” Considering how much debt most people have, these numbers make sense. According to research published by The Ascent, the average American household debt is $145,000.
Being buried in debt is stressful, which makes paying it off all the more important. When the mind and body are chronically stressed, a person’s health undoubtedly suffers. For example, debt-related stress can cause insomnia, headaches, stomach pain, high blood pressure, hypertension, fatigue, and chest pain. When the stress of debt manifests in a physical way, it’s a huge indicator that it’s time to make a change. Your health, happiness, and general well-being are at stake.
In this article, learn how to get rid of debt by taking the measures required to live entirely debt-free with 8 simple, but effective strategies.
1. Create a Budget
The first step in eliminating debt is figuring out where to use your money each month by creating a budget. Start creating a folder on your computer where you can store all your e-bills. If you have physical bills, gather them together in a file folder. Next, sit down at your computer, open a new spreadsheet on Google Sheets or Microsoft Excel, and start running through your finances.
How to Create a Budget
STEP 1: Start the budget by first listing your income.
Income includes your salary, dividends, investments, and any other factors that contribute to the total amount of money you have each month.
Your income column should look similar to this example:
Income for the month of __________.
|Income from Property Investments||$15,000.00||$13,500.00|
STEP 2: List your monthly expenses.
Make sure to include both fixed and variable expenses. Fixed expenses are standard monthly expenses that usually include rent or mortgage payments, car payments, college funds, and credit card payments. Variable expenses are less predictable. They might include car or home maintenance, groceries, medical fees, entertainment, and other less definitive expenses. Also, categorizing expenses allows you to quickly see where your money goes each month.
Part two of your budget will look like this:
Expenses for the month of __________.
|TOTAL||$1200||$1280||$80||Owe $80 more|
STEP 3: Add all of the expenses together and compare them to your income.
If you’re breaking even each month, make the appropriate adjustments. Don’t let the money you earn be ineffective. Instead, look for places to cut out unnecessary costs. While it might be hard to break unhealthy money-spending habits, it is better than feeling the anxiety and guilt debt causes. Opt for canceling monthly subscriptions, spending less on leisure, and limiting shopping trips and non-essentials.
2. Make Paying Off Certain Debts a Priority
To aggressively tackle debt, start prioritizing paying off certain balances. Start by creating a spreadsheet page dedicated solely to debt. Next, list your creditors, their interest rates, and the amount you owe them. This includes student loan debt, mortgage payments, credit card bills, and car payments. For example, this might look like:
|Debtor||Interest Rate||Amount Owed|
Implement the Debt Avalanche or the Debt Snowball Methods
Based on the amount you owe and your personal financial situation, choose to start paying off debt using either the debt avalanche or debt snowball strategies.
Those using the debt avalanche method make the minimum payment for each debt. After this, the remaining budgeted monthly repayment funds go toward the balance with the highest interest rate.
Dave Ramsey, a leading expert on helping people get financially free, prefers the debt snowball. Like the debt avalanche, the debt snowball begins with paying the minimum on each debt. But instead of the remaining funds going toward the highest APR, this money is used to pay off the smallest amount of debt owed. Although either approach is extremely effective, for those wanting quick results and a sense of momentum, the debt snowball is likely the best plan of attack.
3. Pay More Than the Amount Owed Each Month
When debt piles up, a person’s credit utilization ratio (CUR) rises, which can drastically affect their credit score. Those with generally good credit scores use less than 30 percent of the total credit amount available to them. If you want a great credit score, this number changes to 10 percent. Jim Droske, president of Illinois Credit Services, tells CNBC the key to using credit cards is: “Don’t treat [them] as a long-term loan. Consider it a short-term loan and a convenient way to pay for things.”
Paying the minimum each month as interest accrues only results in owing an increased amount over time. Instead, opt for paying as much as possible on your credit cards. For instance, instead of making a minimum $29.99 payment on a $560.00 total, start putting a dent in the principal balance by paying $100.00 or more. Before long, you will have paid off that debt and be ready to move on to paying off more.
4. Cut Back on Expenses
One of the most logical things to do when eliminating debt is to remove as many expenses as possible. While daily habits like purchasing a coffee at Starbucks or going out to lunch with coworkers might seem harmless, they detract from the money you can use to pay off debt. In the words of the author of From the Rat Race to Financial Freedom, Manoj Arora, “When you know the impact of little expenses, you will realize that there is nothing little in this world.”
When running through your budget, look at the numbers. Where can you save? How could your money be better applied? Make a list of 10 unnecessary expenses you have every month. Rank them from “most necessary” to “least necessary.” After doing this, keep the top three and cut the bottom seven. At the end of the month, use all the saved money toward paying off debt using either the debt avalanche or debt snowball methods.
Additionally, think about downsizing. Considering your current income and expenses, are you living outside your means? If so, how? This might look like struggling to afford your mortgage or car payment. When this is the case, consider selling the large-scale expenses that prevent you from financial freedom. Choosing less expensive options is better than facing the burden of trying to scrape enough money together to survive every month.
5. Get a Side Hustle
One popular way of earning extra income to pay expenses or reduce debt is to develop a side hustle. A survey conducted by SunTrust Bank found that “64% of millennials said they have a side hustle or have had one in the past.” A side hustle can be any type of part-time gig outside a full-time job. For example, this could include providing business consulting or marketing services, offering a room in your house on Airbnb, renting out your vehicle on Turo, or becoming a Lyft or Uber driver.
It’s understandable why this option is becoming increasingly more common. Assistant professor at Mercy College, Alexandrea Ravenelle explains why side hustles are on the rise: “Even though incomes are finally back to where they were before the Great Recession, there’s still a perception for a lot of people that their income is just not hitting their expenses. Even if incomes are going up, expenses seem to be going up even faster.” As many people find their cost of living multiplying, they’re looking for creative solutions like side hustles to stay financially above water.
Think about what you can offer in exchange for an income boost. This might look like skills like design, writing, teaching, tutoring, or starting an online store. Also consider renting out personal possessions like storage space in your house, lighting equipment, a high-quality camera, tools, clothes, rooms, or vehicles. Many people with side gigs average well over $500 per month, extra income which can pay off credit card bills and alleviate some of the stress caused by debt.
6. Refinance Your Home
If you’re a homeowner, one way to accelerate the process of getting rid of debt is to refinance your house. So, how does refinancing work? When a person goes to refinance their home, they take out a new loan that pays off the remaining mortgage. Doing so provides benefits like lower interest rates and tapping into equity, which usually means smaller monthly payments. For example, refinancing with a fixed-rate mortgage promises the same interest rate throughout the duration of the loan. A lower interest rate with a fixed-rate loan allows people to pay off their house faster and decrease a major expense.
To refinance your house:
- First, make sure you qualify for a new loan. If your financial situation is unstable or your credit score is too low, finding a lender will be difficult. Should this be the case, work on some of the strategies listed above. As your debt becomes more manageable, your chances at refinancing will improve.
- For those who are ready to refinance, start by comparing lenders. Look at the qualification requirements, interest rates, fees, and loan term options offered by various institutions.
- Apply for the loan that best suits your financial situation.
- If the lender accepts your application, the underwriting process will begin. During this period, an underwriter assesses risk and determines whether or not to move forward with the loan applicant. They will do things like order an appraisal, look at credit history, analyze assets and income, verify employment, and check into a person’s debt-to-income ratio.
- Once approved for a new line of credit, you will close on the house with your new lender.
7. Pay Less Interest with a Consolidation Loan
Debt consolidation is an option for those who have several debts with varying interest rates. Similar to the refinancing process, this is a personal loan that a lender provides to those looking for answers on how to get out of debt faster. Instead of paying multiple companies every month, debt consolidation combines the money you owe together into one single monthly payment.
That sounds like a great option, right? Probably not, according to financial expert Dave Ramsey. He warns people to stay away from consolidating debt, explaining in an article on his website, “Be on guard for ‘special’ low-interest deals . . . loan companies will hook you with a low-interest rate then inflate the interest rate over time, leaving you with more debt.” In short, debt consolidation will only restructure debt, not reduce it. It could potentially mean as interest rates fluctuate, you will pay off more debt over a longer period of time.
Yet, consolidation is still a popular choice for many people looking for ways to manage debt. A study from Bankrate found the top reason for a personal loan is debt consolidation.
Here’s how to get a debt consolidation loan:
- Check your credit score since loans and interest rates are largely based upon this number.
- If you’re in good standing, begin researching lender options for a balance transfer credit card, debt consolidation loan, or personal loan from a bank.
- Apply for the credit card or loan that works best for you.
8. Get a Credit Counselor
One of the best ways of learning how to get out of debt is working with a credit counselor. They’re a great source of support for those who are experiencing the anxiety and stress caused by debt. Once matched with a counselor, you’ll start working one-on-one with someone experienced in helping people become debt-free. Whether working together on a budget or creating a step-by-step debt management plan, a credit counselor is a great person to have by your side. Also, there are various nonprofits whose purpose is to assist people with getting out of debt for little-to-no cost.
Find a debt counselor with one of these reputable organizations:
- The National Foundation for Credit Counseling
- Cambridge Credit Counseling
- Consumer Credit
Whatever You Do, Don’t Acquire More Debt
Living debt-free requires a practice of disciplined spending. As you work through these debt-elimination strategies, it’s essential to stop adding to balances. Not doing so will only increase the amount of time and money it will take to pay off principals. Stay away from bad habits like paying off certain amounts of debt so you can spend that same amount the next month. Make erasing debt your target and don’t lose sight of it until you’ve hit your goal.
Most importantly, identify why it’s important to manage your debt. Is your business struggling to meet payroll on time? Are you beginning to worry about your retirement savings? Is the stress of being buried in debt weighing on you mentally or physically? Define your purpose for getting out of debt. Write that purpose down and keep it visible on your desk, in your wallet, or in places you frequent. Look at it or read it aloud whenever you’re considering taking on more debt. Is it really worth compromising a debt-free life? Nine times out of ten, the answer to this question will be “no.” Stay strong in your resolve to decrease what you owe—it’s the only path to true financial freedom.
Interested in developing a strong plan for eliminating debt? Check out the article below next to learn a simple four-step method for creating goals.