An average individual will normally experience borrowing on some type of credit at some point. While some people know how to manage their financial liabilities efficiently, others get stuck in debt, which can be financial, mentally and emotionally stressful. We spoke with the experts who shared their tips on how to get out of debt effectively.
If you want to learn how to get out of debt then you should follow these 25 tips from the pros:
1. Prioritize Paying Off Higher Interest Loans First
Matt Hylland, Founder, Hylland Capital
Many have heard of the tremendous benefits of compounding interest regarding investments before. However, when related to debt, compounding interest works against you as interest builds upon growing outstanding balances. This means that the longer you hold higher-interest debt, the harder it is for you to get out of debt. A higher-interest debt will cost you much more over time and should be your highest priority in paying off. Typically, credit card debts and personal or small business loans will have the highest interest rates.
2. Set a Specific Goal to be Debt-free
Jenna Taubel, Digital Marketing Specialist, First Alliance Credit Union
Getting out of debt is a long-term commitment; there’s not an overnight solution. The most important step you can take is to develop a realistic plan and set a time-bound goal for paying down your debts. For example, you plan to pay off your $10,000 in credit card debt in three years by paying $280 toward your debt every month. However, make sure your goal is realistic for your budget. If you can’t afford that $280 per month, then you’ve set yourself up for failure and may need to consider extending your timeline to five years for a more affordable payment. Having your goal planned out and written down can go a long way to helping you successfully get out of debt.
3. Apply the ‘Profit First’ Accounting Method
Huw Moxon, Digital Marketing Manager, Informi
This involves opening several bank accounts — your regular current account, one for your own wage, another for tax and finally one for a rainy day. You then apply the percentages to your income and as soon as you get paid, you transfer these percentages into the accounts. For example, you have 70 percent as your wages, 10 percent tax and 5 percent for rainy days. This leaves 15 percent in your current account for expenses. After this, you’ll hopefully be in a position to reach your earning target with the sales you already have. However, you can also work backward, using these percentages, to price your services and products.
4. Get Professional Advice
Tracy Becker, President & CEO, North Shore Advisory
Revolving (credit card) debt can have a great impact on credit scores as it will increase your balance-to-limit ratio and lower the amount of available credit that you have. The higher your revolving balances inch up to the limits, the more it hurts the credit scores. Depending on the situation and your credit scores, a bankruptcy, debt consolidation plan, or a setup of a budget and timeframe for getting out of debt could be options. Once you’re ankle-deep in revolving debt, it can be tricky to dig yourself out so getting professional advice is important.
5. Find a Way to Increase Your Income
Cornelius Davis Jr., Financial Coach, CorneliusDavisJr.com
A common mistake is believing that they can somehow get out of debt using only the money they already make. While it’s true that most of us can do a better job maximizing our income, cutting back expenses is not enough to get most people out of debt. If you plan to make any headway paying down your debt, you have to bring in additional income.
6. Establish a $1,000 Emergency Fund
Eric Nager, CRPS, Investment Advisor Representative & Vice Chairman for Governmental Affairs, Southern Capital Services
This is a very important first step before trying to start retiring debt. Having an emergency fund will help keep you from getting deeper into debt when unexpected events happen. If, for example, you have $1,000 in cash set aside and your car or house needs a sudden repair, you do not have to put that repair on a credit card. Ideally, you will want to get to the point where you have an emergency fund worth three to six months of expenses so you can support yourself temporarily if you suddenly lose your job, but the $1,000 is a great start.
7. Transfer Credit Card Balances if You Can
Daniel Gamez, Debt Relief Attorney & Owner, Gamez Law Firm, PC
Some credit card companies offer a 0 percent interest rate on balance transfers and purchases for 15 months. Transfer your balances on high-interest credit cards to an interest-free (or lower-interest) credit card. Be sure to not close your old credit cards with the high-interest, however, as this could give your credit score a hit.
8. Get Help with Debt Settlement
Sean Fox, Co-president & CRO, Freedom Debt Relief
This can be especially helpful for someone with serious debt (generally $7,500 or more), who is struggling to make minimum payments and who have suffered a financial hardship, such as job loss, medical expense and divorce. Regulated by the Federal Trade Commission, debt settlement companies work on a consumer’s behalf to lower the principal balances owed. It usually takes two to five years and is best for those who would otherwise need to consider bankruptcy. Check the American Fair Credit Council for reputable providers.
9. Use the ‘Debt Snowball’ Method
Christian Stewart, Founder & Lead Financial Coach, Do Better Financial
The debt snowball method is an effective budget strategy to pay off debts. Write your debts down from smallest to largest, make minimum payments on everything, throw any extra money at the smallest debt until it’s gone and then rinse and repeat for each debt as needed. Seeing the debts drop as you go keeps you motivated for the long haul.
10. Change Your Spending Habits & Behaviors
Kalen Omo, Personal Finance Coach & Owner, Kalen Omo Financial Coaching
One common misconception is thinking that paying off debt can be done quickly. In reality, it takes time and a good budgeting strategy. You also need to change your spending habits and behaviors to be able to pay off your debts effectively. It’s more about common sense than dollars and cents.
11. Pay Off the Smallest Debt First
Ellie Thompson, CEO, Money Therapy
Paying off debt can get addicting if you do it right. Do not try to pay off your massive student loan as your first debt payoff. Start with your smallest dollar amount so that when you pay off your debt, you are excited to tackle the rest. Money has psychological and emotional ties so do what works and pay the smallest first.
12. Use Debt Consolidation to Make Debt Payments Affordable
Chad Zollinger, Chief Editor, Debt & Tax Blogs, BestCompany.com
There isn’t an easy and quick way to get out of debt. You have to discipline yourself daily and to be consistently financially responsible for months or even years. If you need help with paying off your different debts, you can go to a debt consolidation company, and try to apply for a debt consolidation loan. You have to know, however, that you’ll have to spend a bit of money on fees.
Use Fit Small Business’s debt consolidation calculator to learn how much you could save.
13. Negotiate with Creditors for Lower Interest Rates
Alexandra Zelenko, Marketer & Technical Writer, DDI Development Company
If you’re having difficulty paying off your debts, you may contact each credit card provider and negotiate a lower interest rate. You might be surprised at how understanding some lenders could be, especially if you’re a long-term customer.
14. Avoid Taking on New Debt
Natasha Rachel Smith, Personal Finance Expert, TopCashback
Getting out of debt goes beyond making monthly payments, it takes discipline and self-control to avoid taking on new debt. Stop using a credit card to fund your lifestyle. Make a conscious decision to stop borrowing money, whether it be from a credit line or credit cards. By putting a stop to borrowing money you don’t have, you can focus solely on your existing debt and avoid any new debt from forming.
15. Stop Spending Too Much
Janice Schacter Lintz, Consumer Education & Travel Writer, JaniceLintz.com
Stop shopping. We all have more than we realize we need. We have all heard it but fail to shop our closet. If the clothes aren’t what you want to wear, then sell them online, which will bring in revenue. Otherwise, wear what you own and stay out of the stores.
16. Keep a Money Journal of All Your Financial Transactions
April Caldwell, Money Coach, April Caldwell, Inc.
Keep a money journal to know where every dollar is going so you know where you are leaking money and can reapply that to debt. It’s best to go after the low-hanging fruit first. Pay first what you think you can pay off in the next 30 days. That is a quick win and a great motivator.
17. Use the Cash Envelope System to Help Stick to Your Budget
R.J. Weiss, Certified Financial Planner & Founder, The Ways To Wealth
One of the most effective ways to budget to eliminate debt is using the cash envelope system. This is where you place a predetermined amount of money in different envelopes labeled with different spending categories. Anytime you spend within a category, the money must come from the corresponding envelope. When the money is out, it’s all out, and you can’t overspend.
18. Prioritize High-risk Debts First
Elyssa Kirkham, Finance Writer & Debt Expert, Student Loan Hero
Pay off any past due debts first so that you’re current on all accounts, which prevents late fees or continuing damage to your credit. When deciding how to prioritize debt, you can also consider which ones present a greater “risk” or cost to you than others. If you suddenly were unable to make your loan payments on a car, for example, your vehicle might be repossessed. This could have far-reaching effects if you became unable to get to work on time, or at all. So, while they aren’t always the most expensive debt, paying off a car loan can provide greater security.
19. Create a Realistic Financial Plan
Byron Ellis, Founder, Doing Money Right
When you first create a financial plan, you never know what the results will be. Sometimes, it can even be a little scary to see how things will look if you don’t make any adjustments. The key is to have patience. Financial planning is a process and not an overnight event. In creating a financial plan, focus on the things that you can control and keep a long-term perspective.
20. Avoid Trying to Pay Off All Debts at the Same Time
Justine Nelson, Founder, Debt Free Millennials
Trying to pay off all your debts at the same time is one of the most common mistakes in debt management. You’ll experience overwhelm, run out of cash and end up incurring new debts or loans. Stick to paying off one debt at a time and make sure to create a concrete and realistic budget plan first before you start paying off anything.
21. Create a Budget That Helps You Pay Off Debts
Leah Hadley, Senior Financial Advisor, Great Lakes Investment Management
The most important first step to getting out of debt is to create a budget and take a hard look at your spending. This can be eye-opening for people who have never tracked their expenses. You have to get serious about reducing or eliminating certain unnecessary expenses. Be prepared to make sacrifices. This might mean a zero-dollar budget for things like date nights and new gadgets. Steer clear of temptations as much as possible, which might involve avoiding the mall or unsubscribing to emails from your favorite online retailer.
22. Refinance Your High-interest Debt
Ryan R. Boggs, Wealth Advisor, FourStar Wealth Advisors LLC
If you have a good salary and have established income/tax returns, there are lending companies like SoFi, Lending Tree and Lightstream that offer loans at competitive interest rates. Thus, you can take a low-interest loan and use it to pay off your high-interest debts but make sure to stick to your monthly budget so you won’t be spending beyond your limit, and you will be paying off the low-interest loan.
23. Review Your Assets & Convert Some Into Cash
Lingke Wang, Co-founder, Ovid Life
To get out of debt quickly, you have to look closely at your assets. Real estate assets that are expensive to maintain, life insurance policies that are no longer necessary but have expensive premiums and investments with returns lower than the interest rate on debt should all be converted into cash right away. Be aware of the tax implications of liquidating assets. Typically, proceeds from a life settlement and money from the sale of a primary home aren’t taxable. Check with a certified public accountant before making any big moves.
24. Define Your Own Credit Card Spending Limit
Sophie Miles, Vice President, CalculatorBuddy.com
Bad handling of a credit card occurs when a person has more than one in his power and use each one of them to their credit limits. This can generate a total expense that can exceed your monthly income in two or more times. It’s best to establish a limit like a margin of guarantee of at least 30 percent lower than the credit limit. For example, if your credit limit is $3,000 per month, then with a security capacity of 30 percent, you can define your own spending limit as $2,100.
25. Automate Your Debt Payments
Brian Davis, Director of Education, SparkRental
Discipline yourself to make regular payments on your debts, prioritizing your smallest debt to make early wins in eliminating debts. Automate those debt payments, so it doesn’t just rely on discipline. Discipline will fail you sooner or later, so the more you can automate “good financial behaviors” like paying down debts and saving money, the more likely you are to sustain them.
The Bottom Line
Learning how to get out of debt can be time-consuming, but it doesn’t have to be difficult if you do it the right way. It can take a lot of careful budget planning, self-discipline and be making conscious financial sacrifices, but the reward is more than worth it. While being able to pay off all your debts doesn’t usually happen overnight, there are efficient “get out of debt” plans and strategies to make you debt-free. Use the above effective expert tips to get out of debt fast.