Debt can be a useful tool when used responsibly, but the end goal is always to keep debts minimal and get out of debt when you can.
There are many good reasons to get into debt, like buying a house to live in, buying a car to get yourself to work, or paying for tuition for higher education. But it's still nice to learn how to get out of debt fast, especially if you want to practice debt free living. Maintaining a low debt to income ratio also helps build up your credit score and a debt free lifestyle can be stress free and fulfilling.
Step 1: Pick a Debt Management Strategy
There are many debt management strategies out there and each has its own pros and cons. Some will help you learn how to get out of debt fast, others will help you stay free from debt all together, and others will help you manage types of debt to your advantage. There's a chance that debt consolidation could be right for you.
The Debt Snowball Method
The debt snowball method is for paying down debts. It involves paying off the smallest loans first and working your way up to paying off the debts with the highest amounts.
This method is great for boosting your confidence when tackling debts and giving you smaller wins sooner to help keep you motivated.
The Debt Avalanche Method
The debt avalanche method, also known as the stacking method, is for paying down your debts. It involves paying off the debts with the highest interest rates first and the debts with the lowest interest rates last.
This method is great way to reach more of your savings goals because the highest interest rates will cost you the most the longer they remain unpaid off. The more you save the more you can put toward emergency savings and high yield savings accounts with an advantageous annual percentage yield (APY).
Debt Relief Programs
Debt relief programs help reorganize and make plans around your debt, usually to relieve or forgive the debt partially or in full. This might take the form of lowering the principal amount owed, lowering the interest rate, extending the loan term to provide more time for repayment, and more.
This method is great when the borrower has limited options and a debt to income ratio that's too high.
Debt Consolidation Loans
Debt consolidation loans take all the debt you’ve accumulated on multiple accounts and combines them into one account and one monthly payment with one interest rate.
This method is great for getting you one interest rate, one minimum payment, and one credit account instead of multiple ones compounding on top of each other.
Step 2: List All Debts, Expenses, and Income
Once you have a debt strategy in mind, you can start gathering the details of your plan. The best way to do this is to make 4 lists, a list of all your debts, a list of all your expenses, a list of all your income, a list of all your accounts and minimum payments, and a list of all your interest rates. This will help you see all the money you have coming in and out of your accounts.
- List all your debts, including revolving debts like credit cards or federal student loans.
- List all your regular expenses like monthly rent and other bills.
- List all your sources of income.
- List all your financial accounts, their totals, and any minimum payments.
- List all your interest rates.
These lists will help you see all the details of your personal finances. You'll see your high interest rates next to your low interest rates, you'll see your credit card balances or personal loan amount next to your savings account balance and your emergency fund balance. You'll see what types of credit you owe and the reasons why.
Extra Tip: Make a note of any prepayment penalties associated with your credit accounts. Balance transfers or early repayment might not be the best idea for accounts that have high prepayment penalties.
Step 3: Reduce Expenses
Look for ways to reduce expenses. The less you spend, the more you'll have to put toward your debt payoff plans. Reduce expenses by eliminating what you can and making economic substitutions to save money on the things you can't eliminate.
Ideas for How to Reduce Expenses:
- Cancel subscriptions
- Join family subscription plans with friends and family to split costs
- Switch to a cheaper phone plan
- Eat at home more and eat out less
- Switch to generic brands at the grocery store
- Plan free activities like hiking instead of the movies
- Pack a lunch instead of going out to eat on your lunch break
- Save on gas and use public transportation, walk, ride your bike, or carpool
- Cancel your gym membership and go running in your neighborhood instead
- Shop at thrift stores, yard sales, and neighborhood marketplaces
- Grow a produce garden
- Reduce utility bills by using less water, lights, heat, or AC when you can
- Invest in reusable products like cloth towels rather than paper towels
- Use more coupons when shopping and watch out for deals
Step 4: Increase Income
Increasing income so you have more money coming in each month to go toward credit card debts, car loan payments, student loan payments, and essential expenses. Making more money will allow you to also increase your loan payments and will allow you to pay off debts faster.
Ideas for How to Increase Income:
- Sell things you don’t need anymore
- Ask for a raise
- Find a better-paying job
- Start a second job or a side gig
- Receive passive income
- Make profitable investments
- Start a small business from home
Step 5: Create a Better Budget
Sometimes the key to getting out of debt is very simple—you might just need a better budget. Sticking to a budget is especially important when you're trying to pay off debts so you can turn to living a debt free life.
You could use an envelope system to help you stop overspending or you could use a budgeting app. Budgeting apps can link to your existing financial accounts, so you don't have to switch to cash to organize your expenses and debt payments.
Use debts responsibly when you need to, but always include those debts in your budgeting plans. This will help you be proactive about debts so they don't get out of hand and weigh you down too much.