When you’re little they don’t teach you the effects of being in debt. Sure, some people might tell you that you shouldn’t get into debt but they don’t tell you about the stress and anxiety that it causes which are good reasons to get out of debt
They don’t mention how being in debt is like a giant weight hanging around your neck that you have to carry around with you.
When you’re in debt, almost every life decision you make revolves around that debt.
Friends want to go on a trip? Hm, you’ll have to think about it because you’re drowning in debt and don’t want to add more to it.
Emergency? Well, now you’re stress levels have multiplied even more.
Because of debt I’ve had to miss out on weddings, celebrations, and even a funeral or two. Debt just isn’t a fun thing to be in and that’s why I threw a party for one the day I was no longer in debt.
It’s amazing what happens when you finally have control of your financial situation and every decision isn’t based on whether or not you have room on your credit cards.
I know for a lot of people trying to get out of debt might seem impossible but I’m going to show a simple step-by-step process that will help you reduce the debt that you’re in.
Get Out of Debt: 7 Steps to Follow
First, we should address what is debt?
Debt simply means you owe other folks money. When most people think about debt they usually think about a person that spends more than they make and that isn’t the case.
A lot of doctors and lawyers are in debt due to the cost of school. However, they have manageable debt because they can make payments.
Then there are people like myself who got into so much debt there seemed like no way to get out of it. You use one credit card to pay for another credit card which starts a vicious cycle that you can’t get out of.
But you can and that’s what this step-by-step guide is for. Getting out of debt isn’t an impossible task. It’s just a little more difficult than the tasks that you are used to.
1. Understand What Got You Into Debt in the First Place
This is important because if you don’t understand the habits that caused you to fall into debt then you’ll just end up making the same mistakes over and over again.
This means you need to revisit the path to understand where things started to go wrong. It might not have been a big event. It could be a lot of little events.
Maybe you went on a restaurant binge and ate out every night for 6 months straight.
Maybe you purchased a car when you were expecting a raise and the raise never came.
Your debt could be the cause of a singular event or multiple but it usually revolves around your inability to manage money properly.
I don’t say this in a negative way. Many of us didn’t grow up in homes where you get taught how to manage money. I didn’t learn how to do it until my 30s!
Your debt might not be your fault. You might have had a medical situation that suddenly left you with a $40,000 bill for some stitches.
You aren’t supposed to beat yourself up over your past mistakes that put you into debt, the key is simply understanding what happened and finding ways you can prevent them from happening again in the future.
In this world, it’s very easy to get into debt. Companies are willing to hand out credit because they know they can latch onto you for a number of years.
Reflecting on these things isn’t meant to cause you grief or suffering. It’s simply meant to help you prepare for the future.
If you want to understand some of the bad habits that are costing you money then check out this excellent post on Surviving Cents.
2. Change Your Spending Habits
When I switched over to the ketogenic diet it was one of the toughest things I’d ever done.
Because it meant changing my lifestyle.
You get so use to doing things a certain way that it becomes really hard to break the pattern.
The same thing happened with me and money. When I got money I spent it because I wanted something.
I ended up with so much useless crap that I could’ve opened up my own pawn shop.
I also ate out a lot and ordered whatever I wanted from the menu without regard of cost or if I really needed to eat a second order of ribs.
If you want to get out of debt you need to change your spending habits.
First you must understand the basic principle of income in and expenses out. It’s easy to see that if you spend more than you make you’ll continue down a vicious debt cycle that you can’t get out of.
So this is why taking time to create a budget is very important. Also, it’s time to start thinking about an emergency fund which I know sounds crazy when you’re in debt, but it’s possible with the right approach.
It’s important that you understand your spending habits. Spend a week or two journaling everything that you spend money on.
One of the easiest ways to get into debt is by not understanding where your money goes. You might be surprised to find out that $50 is going to lunch at work every week when you get by on $10 a week on lunches from home.
Track all of your expenses to see where things can be cut and what needs to be done.
3. Figure Out How Much Debt You Have
This is a tough one to swallow and for some people it makes them go light-headed. It’s one thing to know you’re in debt and it’s another to know you owe people $43,678.
However, you can’t get out of debt or come up with a plan if you don’t know all of the debt that you’re in.
So whip out the pen and paper or open up a spreadsheet and write down everything that needs to be paid off.
You might also have to check your credit reports of debts that are in collections.
4. Decide How Much You Can Afford to Pay Off
Sometimes you can only afford to pay the minimum on a credit card bill but paying the minimum sucks. It’s how the credit card companies keep you on their payroll (meaning you pay them and they continue to roll around laughing).
To pay off the debt faster you’ll need to make more than the minimum payments but that doesn’t mean you need to do it all at once.
Pick a specific debt and attack it while the others get minimum payments. Once that debt is paid off you have more money to go towards another debt.
This is why it is so vital to set up a budget so you understand how much you can extra you can apply towards debt and where you can apply it.
If you find that you have no way to pay extra towards any debt it might be time to look for ways to make extra money.
You might be able to ask for a raise at work if you’re doing well and don’t forget that it’s always smart to keep an eye out for new job opportunities that will pay you more. Don’t get caught in the mindset that you are stuck where you are at.
5. Put Together a Debt Plan
This simply means you put your debts into a certain order so you know what to attack.
You can sort them by interest rate or by balance. Either way, choose one and list the debts out so you can take care of them.
Which debt do you pay off first?
It’s wise to choose the method that will keep you most motivated to pay off the debt. If you want to optimize your payments as much as possible then targeting the high-interest debt first will be the wise move.
However, this might also mean it takes you a little bit longer to knock off a debt from your list.
If you think that will deflate your motivation then tackle the debt with the smallest balance. That way you can feel great about no longer paying a specific debt and you can quickly push the money over to another debt.
How much should you pay?
Once you figure out your debt priority, it’s time to figure out how much you should pay each month. With your budget in hand figure out how much of a lump sum you can pay towards one debt while making minimum payments to the rest.
How long will it take?
Now you can figure out how long it will take you to pay off a specific debt. To do that you can use a debt calculator.
Because things change it’s important to revisit the debt calculator once or twice a year so you can make sure you’re still on the right path.
6. Start Making Payments
With a plan in place and the knowledge of how much you’re going to put towards a debt the next step is to follow through on the payments. It’s important to stay consistent with your payments not only from a psychological standpoint but also from a credit report standpoint.
Showing that you have the ability to make consistent payments helps to give creditors more faith in your ability to handle debt in case you need to take out a loan of some type.
7. Don’t Create More Debt
It can be tempting to get things in order only to mess them all up again so you shouldn’t do that.
If you need to freeze some credit cards so you aren’t tempted to use them then do that. Some people take this literally and actually freeze their credit cards in giant blocks of ice.
You might not have to go to that extreme but you can see where I’m going with this.
Bonus: Understand You May Falter
Paying off debt is similar to losing weight. You need to stay consistent with your steps but there can be a time where you suffer a setback.
How you handle this setback is important. Some people just give up and go back to their old ways while others will get right back on the path and carry on.
Help Getting Out of Debt
Hopefully, this guide has provided some help getting out of debt. Unfortunately, it’s not a speedy process unless you come across a large sum of money quickly.
Unfortunately, for most people that will never happen so you need to plan things out and understand that your budget is your map for getting out of debt.