How To Get Rid Of Debt To Help Your Finances

With interest rates still stubbornly high and consumer goods prices up 22.5 percent from where they were in February 2020 before the pandemic began, it’s no wonder that so many Americans are drowning in debt. In fact, nearly one-half of credit cardholders carry a credit card balance from month to month.

If you’re one of these debt-laden consumers, you might be wondering how you get yourself out of debt and back on track toward financial stability. The good news is that it can be done. However, it takes some careful planning and perseverance to see it through.

How to be debt-free

Becoming debt-free isn’t something that happens on its own. You can’t count on your balances to magically disappear or wealth to suddenly materialize. You will only get out of debt once you make a plan and take action.

Here is a 10-step process for achieving a debt-free life.

1. Assess your budget

The first and best way to deal with most financial problems is to evaluate your budget.

• Make a list of your expenses. Look through the previous three to six months of bank statements, credit cards and receipts. Write them down and note which ones are recurring vs. one-time purchases.
• Determine your income. Make a list of how much money you earn in a month. For most households, this will be from their primary job. However, you might also make money from various side hustles, investments or other sources.
• Compare your income against your expenses. If your income exceeds your expenses, you’re off to a good start. However, if your expenses are greater, you’ve got some work to do. Go back through your expenses and decide which ones can be cut. Differentiate between items that are “nice to have” vs. those that are “must have.”

If you need help, you can find a good example of how to create a budget here. Budgeting apps can help you streamline this process.

2. Evaluate your financial situation

With realistic numbers in front of you, the next question to ask yourself is: How much can I afford to put toward my debts?

This decision may be influenced by other questions such as:

• What are the monthly minimum payments required by my lenders?
• What will my budget allow without cutting into necessities?
• At this rate, how long would it take me to pay off my debt in full?

It would also be a good idea to round out your financial profile by checking your latest credit score. Your credit score can impact your approach to some advanced strategies we’ll explore later, such as negotiating with your creditors or consolidating debt.

3. Accelerate your payoff progress

The order in which you pay off your debts can be just as important as how much money you put toward them. In parallel with the previous step, you may also want to integrate a proven debt payoff method into your strategy.

Two popular methods have both been successful for many consumers: the debt snowball and the debt avalanche.

• The debt snowball method. Make a list of your debts by balance size and focus on paying off the one with the smallest balance first. As each account gets paid off, roll the amount you were paying toward the next one, and so on. Be sure to continue making the minimum payments on your other debts.
• The debt avalanche method. Make a list of your debts by interest rate and focus on paying off the one with the largest annual percentage rate (APR) first. As each account gets paid off, roll the amount you were paying toward the next one, and so on. Again, be sure to continue making the minimum payments on your other debts.

Many people swear by the debt snowball method because it can produce several quick wins and encourage you to stick with the system. However, you most likely pay more in interest than you would with the debt avalanche, so take this into consideration when determining which route to take.

4. Automate payments

Automating payments relieves the stress of remembering payment due dates and reduces the potential for late fees. It also helps with money management, saves time and improves your credit score if you stick to the plan.

When implementing automated payments, be sure there’s enough money in your account to pay your credit card or loan balance. An overdrawn account could generate unwelcome fees and extra costs, so avoid this by making sure there are always sufficient funds to cover the payment.

5. Negotiate with creditors

Credit card companies and lenders want to be paid back, and they’re often willing to work with you if you can meet them halfway. Therefore, attempting to negotiate with these companies might be to your benefit.

If you put forth an agreeable proposal or a reasonable explanation why you can’t repay your debt in full, the lender might offer any of the following:

• Temporarily pause payments
• Reduce or eliminate late fees
• Agree to a settlement amount

Remember that the lender is not obligated to reduce what you owe, so never demand or become hostile if they are unwilling to participate.

6. Utilize available resources

You might consider a few other methods when strategizing how to pay down your debt quickly:

• Debt consolidation. Debt consolidation involves taking out a new loan to pay off several smaller ones. This may reduce the total APR or extend the length of the loan, making the monthly payments more manageable.
• Balance-transfer credit cards. A balance transfer involves moving debt from a high-interest credit card to one with a lower APR. Many credit card companies even offer a 0 percent APR promotion where balances transferred accrue no interest for the next six to 12 months. This allows you to pay them down without paying interest for a season.

7. Seek help when needed

There’s never any shame in asking for help, especially when it comes to your finances. Agencies are available to assist as needed. Consider the following:

• Credit counseling. Work with an accredited nonprofit credit counseling organization for help with budgeting and creating a realistic debt management plan.
• Credit repair companies. These organizations specialize in correcting credit reports on behalf of consumers. Credit repair companies can help you navigate the often-complex process of identifying and disputing inaccuracies in your credit history.
• Financial advisors. Partner with an experienced debt-reduction advisor who can help you budget, pay off debt and put what’s left over toward savings.

8. Resist adding to your debt

Nothing sabotages your efforts to become debt-free like digging yourself into the hole even further. It’s important to resist taking on any new debt as much as possible.

This means no new loans or new credit cards (unless they are part of your debt payoff strategy as mentioned above). Additionally, beware of sneaky ways that retailers are tricking people into buying more such as “buy-now-pay-later” installment loans. These arrangements can add unnecessary expenses and interfere with your efforts to pay off what you already owe.

9. Build your emergency savings

A good long-term strategy to better manage your finances and avoid debt in the future is to build an emergency fund. An emergency fund is generally three to six months’ worth of living expenses stashed away in cash and available to use as needed. This can be very useful because it allows you to pay for unplanned expenses outright without relying on a credit card or a small loan.

It can seem like a tall ask to build an emergency fund while trying to pay down your debt. However, it can be done, especially if you start small. Even putting aside a few dollars a day into an account can quickly add up.

10. Increase your income

The more money you can earn, the more you’ll be able to direct toward paying down your debt. Look for opportunities to pick up additional hours or change to higher-paying positions. You may also be able to take advantage of the gig economy. You can choose from many side hustles to add more money to your monthly bottom line.

The bottom line

Paying down your debt can be challenging, but it’s not impossible to do so within a reasonable timeframe. Getting debt-free in a year relies on your willingness to commit to a budget, adopt a payoff strategy and stick to it.

The most important aspect is to always look forward to success. Don’t get stuck believing your situation is hopeless. Stay motivated to keep moving ahead and working toward that ultimate goal of achieving financial stability.