How to Get Out of Debt
Few people secure their financial futures as well as Dave Ramsey, host of the nationally syndicated Dave Ramsey Show and author of The Total Money Makeover. Although some of his methods may seem a bit extreme to some people, this is where the rubber meets the road. Ramsey talks straight and, when it comes to debt, he’s mostly in favor of one-on-one counseling to help develop a customized plan for getting out of debt.
But you don’t need to speak to a counselor to get your debt in order. Ramsey’s method is a mixture of common sense and genius. He encourages his listeners to:
Adopt the debt snowball method – you pay off the smallest balance first; every dollar you pay on your smallest debt is matched by an equal amount of dollars you take off the next debt – and then go on to pay the second-smallest debt.
you pay off the smallest balance first; every dollar you pay on your smallest debt is matched by an equal amount of dollars you take off the next debt – and then go on to pay the second-smallest debt. Get a handle on your debt – develop a written plan to stay on top of your debt
Develop a budget that balances your income with your obligations.
Try the debt-snowball method.
A debt snowball is a simple, visual way to organize your debt repayment strategy by paying off your smallest debts first while adding money to your debt-payoff “bank account” for additional payments on larger debts. You will get the satisfaction of paying your debts down as quickly as possible while simultaneously getting the snowball rolling (no pun intended).
Most importantly, you get to “win” every month. No matter how little or how much you are able to throw on your smallest balance on any given month, you will have your small debts paid off as quickly as possible. This will make you feel good about your progress and help you stay motivated to continue paying off debt.
Get the ball rolling on your debt snowball by setting aside a small sum of money for debt reduction each month. Each time you put some money toward your debt, make a note in a debt snowball chart, along with the name of the creditor, your balance and your payment amount. Continue to make a note every time you pay off a debt.
As you pay off each creditor, circle its balance on the snowball chart to show it’s been paid off. The chart will act like a map, showing you which debts to tackle next, as well as the sum total of debts you’ve already benefited.
Take on the debt avalanche.
In many ways, it’s simpler to pay off debt in order of smallest to largest. Any time you make a payment, you knock something smaller off the list, which leaves you more breathing room to tackle the larger balances. Because of the psychological value of knocking out debt quickly, getting rid of debts adds motivation and reduces feelings of hopelessness.
Still, that strategy is only going to take you so far. At some point in your debt payoff history, you’re going to have three or four balances that are all about the same size. That’s when you have to determine what kind of debt payoff strategy is best for you.
ESPN host and author of “Life Lessons from the Golf Course,” Michael Collins breaks down the two basic methods for paying off debt. One strategy suggests that you pay the smallest balances first and then roll the money you’ve saved moving forward into the remaining balances. The other strategy is to pay each of your debts the exact same monthly payment.
Pay off debt faster with a 0% APR credit card.
If you're drowning in credit card debt or underwater on your mortgage, then you can think of yourself as a "debtor." Statistically speaking, there are about 117 million debtors in the United States. In many ways, debtors are like the rest of us, but they lack many of the same economic benefits as more financially secure people.
Certified credit counselors say you become a debtor when you fail to live within your means, spend more money each year than you make, and become obligated to pay off debts. Your credit card debt, auto loans, mortgages, and installment loans are all examples of debts. Even a reasonable amount of student loan debt can have a negative impact on your finances.
Unfortunately, once you become a debtor, you are liable to stay a debtor—unless you take action to improve your situation. Many debtors stay hidden for years; they won't take a phone call from a debt collector and they avoid opening credit card statements. Eventually, they may gain the courage to seek help from a third-party debt relief agency or financial planner. Many debtors die with debt hanging over their heads.
Consolidate or refinance your debts.
Rather than keeping all of your debts separate, consider consolidating or refinancing them. Consolidation is a process where you combine multiple debts into a single monthly payment, which can help you save time and money that you would normally spend tracking your debts and managing multiple due dates. Refinancing is similar to consolidation, but it allows you to consolidate and reduce the rate of your existing debt. This may seem a little counterintuitive, so let me explain.
When you refinance a debt, your existing lender will want to know what you plan to use the money for. They want to make sure that the new loan will benefit you as well. If the debt is being refinanced to consolidate multiple debts into a single payment, or if you plan to use the money to improve your credit score or your living conditions, then the lender may be willing to lower your interest rates or extend the length of the loan.
If your debt became overwhelming, you might be wondering how to get out of debt without bankruptcy. The best way to deal with overwhelming debt is to modify your spending habits and cut back on your spending. After all, the more you owe, the more interest you have to pay to creditors. Making late payments, missing payments and paying only the minimum on your bills, will only compound your debt and cost you more.
One of the best things you can do is contact a debt consolidation expert. Also, if any of your bills were addressed to multiple people, get them corrected. Often, you pay someone else’s bill not knowing that you didn’t owe it. So, getting this corrected is a game-changer.
Although it can be a bit overwhelming to make all these changes, don’t be deterred. Here are a few pointers.
1-Figure out how much money you need to raise to pay off your minimum payments. That’s the first step in how to get out of debt. 2-Figure out how much you will be able to save from your paycheck from now on. If you can do that, you’re well on your way to how to get out of debt.
Drastically cut your expenses.
Debt is an insidious, pervasive thing. Make eliminating it a priority, beyond even your budgeting and wealth creation goals. The reality for so many Americans is that they make the minimum payment on their credit card bill, but carry a balance that balances on another month’s minimum payment. If they get a raise, they spend it. If they get a tax refund, they spend it on Starbucks.
The hard reality is that this old-fashioned concept of debt accumulation, which was a symptom of inability to spend wisely well before it was democratized to the point of ubiquity, is one key reason why the country hasn’t truly recovered from the economic collapse of six years ago—even in nominal terms. Aggressive, effective debt elimination is as important to the nation’s economic health as productive behavior, like entrepreneurship, that drives cash generation and the increase of GDP.
Get a part-time job or pick up a side hustle.
Most people find that their major source of debt has been paying for a major purchase, like a car, home or other big ticket item. Once the bill for that purchase is sorted, focus your attention on eliminating the debt from the smaller purchases of everyday life. This includes groceries, entertainment, etc.
Online Tools to Help you Get Out of Debt
Are you one of the more than 70 million U.S. consumers who find yourself in debt? Or contemplating a purchase that might throw you back into the red?
Staying out of debt is so important, not just for your financial future, but also for your overall well being.
If you find yourself in debt, or contemplating and financial decision that might lead you into debt, there are a few steps you can take to help escape the trap of debt and live a happier life.
Track your income and expenses and avoid impulse purchases. The best way to stay out of debt is to trust the numbers. And the surest way to trust the numbers is to track your income and expenses with diligent discipline.
If you keep a close eye on your spending and income, you are much less likely to make impulsive purchases. And if you’re spending is higher than your income, or you simply aren’t sure what your income is, you need to track what you’re spending on for a while to get a clear picture of your finances as they stand.
Credit Sesame is an online financial solutions company with a mission to simplify wealth management for consumers and professionals. They are most affluent online lender, with some big names lending through them including Citibank, Wells Fargo, and US Bank.
If you need a little help paying down debts, use Credit Sesame to take control of your finances. They make it easy by showing you how much you owe, how much interest is being charged, and how much it’s costing you on a daily basis. You can track your progress, get credit tips, and work towards your financial goals.
No matter what type of debt you’re struggling with, Credit Sesame can help. They show you how to get out of debt and help you decide whether or not consolidation loans are right for you. They connect you to a network of lenders that will help you speed up the process of getting out of debt and back to a debt-free life.
Debt doesn’t discriminate. It exists all around us in the form of medical bills, necessities like college loans and retirement savings, and all the other purchases that we promise we’ll pay back – someday.
Although many people don’t realize it, there are effective ways to get out of debt and live debt-free. With the right strategy and some determination, there’s no reason why you can’t get out of debt and leave the stress our debt causes behind for good.
Here are a few things you can do to set it off to the right start.
If I Receive a Large Sum of Money Should I Put it All Toward Debt?
We recently received an email from a young man in his early 30's who had just snagged a six-figure settlement from a rear-end car accident. He was interesting in furthering his career and had a tendency to overspend, which is common today. His initial plan was to put the settlement check in his investment account and invest in mutual funds. Unfortunately, his plan was doomed to fail before he even started.
And I told him I could predict exactly what he was going to do. He was going to be happy for a few days, browse around on Amazon, and eventually buy a high-end grill. At the first check up on how invested his money was, he would be discouraged and move on to something else. This is a common problem and it especially hits people in their twenties who haven’t had to deal with such a large sum of money in the past.
When someone is new to money, the idea of waiting to invest or take a tour around the world seems ridiculous to them. But without patience, we could end up with very little to show for it.
One of the biggest steps to getting out of debt is learning how to say no to friends and family. At first, this will be the most difficult part because most people will insist on doing you a favor if they know you're in the process of getting out of debt.
Make Sure You Have a Savings Cushion
Debt is extremely expensive.
When you borrow money, you have to pay interest on it (otherwise, you could just buy it outright). This interest adds to the cost of the item you’re buying, which makes it more expensive. And that’s just if you’re paying it back on time.
When you’re a few days or weeks late on a payment, the credit card company will often charge you a late fee on top of interest.
Even if you’re paying back the capital with your entire paycheck, the interest you’ll pay over the course of the loan will be larger than the loan itself! All because of compound interest.
If you’ve managed to pile up thousands of dollars in credit card debt or you have a mortgage that you’re struggling to pay, this means that you’re losing more money to interest than you actually borrowed.
The Case for Paying Off Debt
Paying off debt quickly is one of the best financial investments you can make. Debt is a drain on your cash flow.
Think about all the money you’ve paid in interest and late fees over your lifetime, and you’ll understand why it’s important to take it seriously and do everything you can to reduce interest expenses. I recommend using the debt snowball method.
The Case for Investing the Money
If you have a lot of debt to pay off, you may think that a finance company would be the best way to go. Because they charge high interest rates, it often seems so tempting to use their services to pay off your debts. However, the fastest way to get out of debt is to invest the money that you would otherwise give to the finance company in shares instead and let them continue to grow.
My Recommendation for Using a Windfall With Debt
If you've been struggling with debt for a long time, you might have given up hope of ever paying it off and retired to the acceptance phase. If you've accumulated a windfall of any sort, I want you to apply this rule before your brain can even think of spending:
Instead of using your newfound income to buy stuff or to go on a vacation, you should pay off your debt.
For many of you, this has already been your ideal strategy, but if you've never done it…allow me to explain why:
Debt is a downward spiral that's incredibly hard to get out of. It’s one of the few financial defeats that can be debilitating in your lifetime. It affects your self-esteem, your relationships, and your financial freedom. When you're overwhelmed by debt, it's hard to take care of the important areas of your life because you're always working against the debt and not for you. I want to help you avoid any additional negatives by taking care of the debt first.
It doesn’t make sense to take on any new debt until your past debt is resolved. It makes even less sense to take on a car payment or a credit card payment. That’s just paying off one debt with another debt.
Interview with Jason Larkin – A Debt Survivor
What advice do you have for people with debt?
The advice I would give is that you have to accept you have a problem, you have to deal with it and you need to cut up all your credit cards. And you can’t lie to yourself; do not lie to yourself because you won’t get out of debt that way.
What is the best way to cut up the credit cards?
The best way would be to set up a time with a friend and get a really big pair of scissors and cut them up.
And when you cut up the credit cards, you also have to cut up any ATM receipts; you can’t have one.
The reason is because when you have a checkbook you spend your money easily. You can literally just write a check and you blow through those checks. But when you have an ATM receipt you look and say, “Oh, I’ve only spent this much,” and you can think nothing of it.
Small expenses are the ones that kill you.
Can you recommend any budgeting software or debt reduction programs?
Don’t Let Debt Stand in the Way of Your Dreams
It is possible for you to achieve your dreams and goals when you’re in debt. And you don’t have to wait or stay stuck when debt is holding you back.
By taking simple steps to pay down debt and get out of debt, you can feel in control of your money and focus on what matters to you most.
Check out these simple ideas and tips on how to get out of debt:
Make a budget to help you get out of debt.
Budgeting is not difficult when you know how, so this sounds like an easy step. But most of us have never been taught how to do it effectively. If you don’t know how to do it, here are some quick instructions on how to create a family budget.
Consider professional help if you aren’t making progress.
If you’re not making progress towards your debt reduction goal, you might want to consider getting a financial coach. Betterment (which some of my clients use) offers financial coaching from certified financial advisers.