Practical Steps to Get Out of Debt

Whether it’s job loss, medical expenses, or other scenarios, people go into debt for many reasons. Carrying debt can often feel like a weight, but with the right strategies, it’s a burden you can lift.

If you’re struggling to get ahead of your finances due to excessive debt, these steps can help you get things back under control.

Unravel Your Debt

The first step to effective debt management is understanding your financial situation.

• Add up all sources of income, including your pay and other earnings.
• Sort your expenses into two categories: fixed or non-changing, like rent and insurance, and variable, like groceries and gas.
• Be as accurate as possible when estimating your variable expenses to avoid budgeting issues down the road.
• Add your fixed and variable expenses, then subtract the total from your income.
• Evaluate your remaining funds to determine how much can be used for debt repayment.

Once you have your income and expenses laid out, you can look for ways to cut costs, freeing up more funds to pay down debt.

• Use online tools, like calculators, to see how even small cost reductions can lead to big savings in time.
• Identify opportunities to reduce fixed and variable expenses, such as renegotiating service contracts, limiting recreational spending, or finding a more affordable service provider.
• Track your spending and use it to create a budget.

 Lay the Foundation for Debt-Free Living

Healthy financial habits and self-discipline can help keep you from accumulating additional debt that could derail your progress.

One of the most essential money management skills is mindful spending.

• View your budget as your game plan for living within your means and getting out of debt.
• Your budget should prioritize needs over wants.
• Consider the 60-20-20 budgeting rule, which allocates 60% of your income for living expenses, 20% for debt reduction or savings, and 20% for fun.

You should set practical, achievable goals.

• Target your smallest debts first – an approach known as the debt snowball method – to see exciting, tangible results that keep you motivated.
• Alternatively, target debts with the highest interest rate first – known as the debt avalanche method – to reduce the amount of interest you’ll pay over the life of the debt, saving you money.

Keeping track of your progress can also be beneficial.

• Maintain an updated record of your debt reduction progress for visual motivation. You can use manual record-keeping methods, like paper and pencil, or digital tools, like Excel spreadsheets or money management apps.
• Digital tools are typically faster, more reliable, and more convenient than traditional ones because they automate much of the process, minimizing the effort needed to manage your finances and the risk of human error.
• Set a clear debt-free target date and work toward it by setting milestones to help keep you focused and motivated, regularly reviewing and revising as needed.
• Review your credit card and other financial statements each month to check that you’re staying within your budget and that no fraudulent purchases or duplicated payments appear on your records.
• Celebrate wins, even small ones. This will keep you motivated to continue your debt reduction.

Of course, extra cash can also help you chip away at debt.

• When you get a holiday bonus, birthday money, or some other windfall, use at least a portion to pay down your debt.
• Consider options to earn additional income, such as delivering food, renting out a room, or doing online freelance work. Make sure to understand and consider the time commitment and possible tax implications of additional income sources.
• Be persistent in paying down debt, as even minor amounts can accelerate your payoff timeline.

Consolidating Debt

The idea behind debt consolidation is to replace your existing higher-interest debt with just one lower-interest loan, lowering your interest expense and simplifying your life.

• Consolidate debt using a loan, such as a second mortgage or home equity line of credit.
• Secure potentially smaller monthly payments and save on interest over time if you find a competitive rate.
• Be aware of risks and make sure you understand the terms of your agreement, especially if collateral like vehicles or your home is needed to secure the consolidation loan. Collateral can be seized if you default on the loan.
• Debt consolidation is only effective in helping you get out of debt if it is accompanied by changes to the habits that got you into debt in the first place.

Seeking Relief

If you can’t get control of your finances, you can consider reaching out to your lenders for assistance or, as a last resort, contacting a reputable debt-relief organization.

• Reach out to your lender to discuss feasible repayment terms and options if you feel overwhelmed. Some may negotiate with you, and some may offer hardship programs.
• Be proactive and transparent with lenders if you struggle to make payments. By taking the initiative and addressing debt issues early on, you might be able to avoid collections.

Debt relief services are a last-resort option that may help you get a handle on your finances. But use extreme caution. Some debt relief services are scams attempting to steal your money or identity. Others are legitimate but may have undesired consequences.

• Research financial advisors in your area to verify their legitimacy. Your state’s attorney general’s office or consumer protection agency may have information regarding the firm.
• Request a written contract that outlines the debt relief service’s terms, including timeline, costs, and steps. Review it carefully before signing.

Fix Your Financial Future

Overcoming debt is a journey that takes time. Whether you use all, one, or a blend of these strategies, working to reduce your debt is often the first step toward financial freedom. To see how we can empower your journey to a debt-free future, contact us today.