Get Out of Debt Guide

Change your Mindset and Get Out of Debt

Debt is the ball and chain that holds us back from living the life we want to live.  At first using credit seems harmless until our spending gets out of control that results in debt.

Phroogal Get Out of Debt

Culture of Debt and Spending Habits

The first step in debt elimination is an acknowledgement of the true debt picture and an awareness of one’s spending habits. If you don’t have a true understanding of your existing debt then it’s quite hard to create a plan that will work. It might be hard to accept past mistakes and it’s usually the reason why so many choose not to do a debt analysis.

You need to know where you are today in order to create the plan to get to where you want tomorrow.

Curb spending to the essentials.

The focus should be on reducing the amount of money going out. If you’re continually spending at the same rate that got you into debt, then you’re adding to the weight of that ball and chain.

Cut expenses.

The biggest impact to your financial status is reduction of expenses and not the increase of income. Reducing your expenses means reducing your cash obligations. Not only are your freeing up cash to use to pay down debt, you’re also decreasing the cost of your lifestyle in the long term. Eliminate subscription services, negotiate plan rates with providers and find alternatives to housing and transportation.

Debt Reserving Future Time

How to Get Out of Debt

  1. Make a commitment to stop borrowing money. The first step in digging out of debt is to stop adding to the debt load. This may require changes to your lifestyle especially if it is funded through credit. Put the credit card away and start saving money
  2. Organize your debt. If you don’t know how much you owe or whom you owe, it’s difficult to create a plan to pay off debt. Organize and analyze your debt from credit cards, personal loans, home and car loans.
  3. Prioritize debt repayment. Make a conscious effort to cut expenses and focus your attention to paying off debt. Every decision made around money should be filtered around debt repayment.
  4. Make extra cash and pay towards debt. Supplement your income by selling items you don’t need, get a part-time job or perform side hustles. Use the extra income to make additional payments towards debt which reduces the amount of interest paid.

Pay Off Credit Card Debt

By only making the minimum monthly payments on credit cards it can take years to pay off the balance and increases amount of interest paid. Adding an extra few dollars to a credit card payment can help reduce the amount of time needed to pay off the existing balance.

4 Tips to Pay Off Credit Card Debt

  1. Have a plan. Create a credit card debt payment plan. List debt, balances and interest rates. Use either the debt avalanche or debt snowball method to repay your credit cards.
  2. Pay more than the minimum. When possible always pay more than the minimum payment amount. Check your credit card statements on the best recommended amount to pay off the balances in 3 years rather than 20 years.
  3. Balance transfers. You might have credit card debt with high interest and can easily transfer those balances to a 0% interest rate card. This option is great especially when you’ve stopped relying on credit cards for purchases.
  4. Consolidate debt. It is easier to pay off one debt than to pay off multiple credit cards. If you’re able to get approved, consolidate your cards to make one easy payment. Again, stop using the credit cards and focus your efforts into paying off the consolidation loan. Even though you might be lowering your entire credit card bill payments with a consolidation loan, it’s better to use those aggregated former payments to payoff the consolidation loan.

Review your credit card statement’s Payment Information section to see how much is needed to pay the balance in 3 years.

Example: Only making the minimum monthly credit card payment will take approximately 24 years to pay off with a total cost of $26,558.

Credit Card Payoff Example

An additional $81 payment, leads to a savings of $15,653. It might be hard to find an additional $10 so make the necessary adjustments in your budget, reduce expenses and cut spending.

Debt Snowball Method

The debt snowball method to paying off debt is focused on paying off smaller debt balances first. After a smaller debt is paid off the payments are then applied to the next smallest debt balance and so forth. Think of your payment to one card increasing (like a snowball growing larger as more snow is compacted) each time you’ve paid off a balance.

The idea is that your momentum will increase as you see one credit card or loan paid off after another regardless of interest rates. The feeling of accomplishment after paying off one debt will lead you to pay off another.

This method might not make the most mathematical sense since potentially higher interest rate cards with higher balances continue to accrue interest. But, this method focuses on a motivation to get rid of one credit card balance sooner rather than later.

How to Use the Debt Snowball Method

1. List all your debts with smallest balance first.
2. Focus on complete repayment of the debt with the smallest balance first while making minimum payments on the other debts.
3. Apply the payments from the first debt (now paid off) to the next debt (row 2) and so on.

Example:
Credit Card 1 – $500 – $25
Credit Card 2 – $6,300 – $146
Credit Card 3 – $7,000 – $200

In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $25 and add to the minimum payment of credit card #2. This would become a payment of $171. You can choose to add more to the payment as well. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once done paying off credit card #2, you would then use the payments from #1 ($25) #2 ($146) and #3 ($200) to make the monthly payment on credit card #3. After strict adherence you’ll find you’ve snowballed your way out of debt.

Debt Avalanche Method

The debt avalanche method is essentially the same except the focus is paying of the debt with the highest interest first. Once you’ve paid the highest interest you move onto the second highest interest and continue to move down the list until all debt have been paid. You also apply all prior payments from paid off debt to the next debt essentially creating an avalanche.

This method makes the most mathematical sense since you are focused on eliminating debt with the highest interest rate thus lowering the cost of the debt. However, math aside, motivations are quite different.

How to Use the Debt Avalanche Method

1. List all your debts with highest interest rates in descending order.
2. Focus on repayment of the debt with the highest interest rate first while making minimum payments on the other debts.
3. Apply the payments from the first debt (now paid off) to the next debt (row 2) and so on.

Example:
Credit Card 1 – $5,000 – 20.99% – $89
Credit Card 2 – $6,300 – 14.99% – $121
Credit Card 3 – $500 – 9.99% – $20

In this example, you would pay as much as you can on credit card #1. Once paid off, you would use the $89 and add to the minimum payment of credit card #2. This would become a payment of $210. You can choose to add more to the payment as well. While paying off credit card #2 you’d continue to pay the minimum on credit card #3. Once done paying off credit card #2, you would then use the payments from #1 ($89) #2 ($121) and #3 ($20) to make the monthly payment on credit card #3. After strict adherence you’ll find you’ve avalanched your way out of debt.

Consolidate Your Debt

Carefully consider whether loan consolidation is the best option for you. Loan consolidation can greatly simplify loan repayment by combining your loans to one bill and can lower monthly payments. Many banks and credit unions offer debt consolidation loans however most are limited to $10,000. Alternatively, you can apply for a debt consolidation loan through Lending Club with loans up to $35,000.

Pay Off Student Loan Debt

It’s important to reach out to your student loan lenders and get detailed information on your loans after graduation. This can give you piece of mind when figuring out your rights and options. Consider refinancing and making extra payments to pay the student loans quicker.

For federal loans there are different types of repayment options:

  • Income Based Repayment – repayments are based on what you earn and caps your payment based on income.
  • Standard 10-Year Repayment – this is the standard repayment plan if you don’t qualify for other types of repayments.
  • Graduated Repayment Plan – repayments start out low and increase until your loan is paid off in 10 years.
  • Extended Repayment Plan – you can request to extend payments for up to 25 years which would increase the cost of the loan.