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Everything You’ve Ever Wanted To Know About How To Get Out Of Debt

Sophia Randazzo
July 16, 2019

Debt is a massive problem. Whether it is student loans, credit card debt, medical debt, or something else, if you have debts it can so often seem like it’s an impossible cycle to get out of.

To be sure, getting out of debt is hard. But, it can be done.

With that in mind, we are breaking down the steps you need to take immediately to rid yourself of debt.

In this article we are going to cover:

  1. The Two Major Methods For Paying Off Debt
  2. How To Make A Budget
  3. How To Start Saving Money To Put Towards Debt
  4. Whether Or Not Debt Consolidation Is A Good Idea
  5. How To Bargain On Your Debts

How Do I Pay Off Debt?

There are really only two major methods for paying off debt. Deciding which one is best for you comes down to a few factors including interest and personal psychology.

1. The Debt Snowball

It’s easy to lose motivation when you’re paying off debt. The Debt Snowball can help rev up the motivation and propel you into forward motion.

The Debt Snowball method focuses on paying off the smallest debts first, while making minimum payments on your other debt. So let’s say you have:

$4,000 credit card debt, 15%

$22,000 student loan debt, 6.8%

$2000 car loan, 3%

To “snowball” your debt you would make minimum payments on all of your loans but throw your extra cash toward eliminating the car loan first as it has the smallest balance. The point of the snowball is to have quick wins and boosts of motivation. Once that is paid off, you’d then pay off your credit card debt and then your student loan.

As you build momentum (think of building a snowball) you can see your balances go down and get excited. This motivation can help carry you through.

2. The Debt Avalanche

The Debt Snowball may be all about motivation but the Debt Avalanche is all about math. In other words, what can save you the most money in interest? Well, that means focusing on your highest interest debt first. So you’d make minimum payments on all of your loans but throw any extra cash toward your loan with the highest interest rate. That way you can ultimately save money on interest and chip away at the principal balance.

Let’s look at this example again:

$4,000 credit card debt, 15%

$22,000 student loan debt, 6.8%

$2000 car loan, 3%

Using the Debt Avalanche, you’d put your focus on paying off your credit card debt as it has a high interest rate of 15 percent. Once that is paid off, you’d focus on getting rid of that student loan debt until only your car loan is remaining. Over time, you will save money on interest and may have a shorter repayment term.

Of course with both the Debt Snowball and Debt Avalanche methods, you want to always pay the minimum on all of your loans but direct your extra money in a strategic way — whether that be based on the smallest balance or the highest interest.

How Do I Make A Budget?

Budgeting is an essential part of paying off debt and getting a hold of your personal finances. Even those who are not in debt should budget, but those in debt should especially budget. Why? Because budgeting allows you to know exactly where your money is going and why.

There are many ways to budget. You can budget using an app, excel, pen and paper, or a combination of the three (or something else!). There are also many budgeting methods but, essentially, there are two main components to all budgeting: spending and saving. You need to determine how much you spend and how much you can save (especially if you are trying to pay off debt).

Let’s break down how to do this in five simple steps:

1. Look At Your Last Month Of Finances

Feel free to print this out and mark up the pages. If you print it out, highlight the expenses. If you don’t print it out, write down these expenses. Break down these expenses into two categories: FIXED expenses and VARIABLE expenses.

Your fixed expenses are ones that do not change from month to month (rent, utilities, gas, etc.). Your variable expenses are ones that can change from month to month (eating out, groceries, entertainment, etc.). Breaking down these expenses into various categories gives you a great idea of how much money you are spending and where the money is going. This is called the zero-based budgeting method.

Note: If your income varies per month, you should definitely look at three months worth of expenses to get an accurate snapshot of your finances.

2. Write Down Your Minimum Debt Payments

If you have already paid off your debt, this can be your minimum savings.

3. Add Up Your Fixed Expenses, Variable Expenses, And Debt Minimum Payments And Subtract This Total From Your Monthly Income

You *should* have either no money or some money left over. If your expenses are higher than your income, you will need to look at your variable expenses and see what can be lowered. Can you spend less money on groceries? Probably. Should you stop eating out completely? Maybe. Questions like this are essential for every good budgeter!

 And that’s really it. The first time you budget can be a bit daunting but it will become easier with time. Just remember to not overspend and throw all of the extra income you have towards debt.

How Do I Save Money To Put Towards Debt?

Once you have your budget in order and a plan for paying off your debt, it’s time to start coming up with ways to save money to put towards your debts. 

If you are having a hard time saving this money there are a couple of things you can try out:

1. Pay Yourself First

Automate a certain amount of money each week that goes to a separate savings account. By “paying yourself” into your savings first, you are prioritizing saving over spending. You are turning saving into “expenses” and making the payment, however small, mandatory.

Start off small. Saving $5 a week will result in $260 saved in one year. So instead of buying one drink at Starbucks, put that cash towards your savings.

Set a goal for yourself. Do you want to save over $1,000 by the end of the year? Saving $20 a week will result in $1,000 saved in one year (that’s the cost of buying lunch one day a week). Do you want to save $10,000 by the end of the year? Saving $192 a week will save $10,000 in one year. Break it down and work backward to determine how much you need to save each week to reach your savings goal.

2. The Envelope System

If you are consistently overspending in a certain category, use cash for that category. For instance, if you are constantly overspending on your groceries, take out the amount you budgeted for groceries before the start of your week (or month, whichever you prefer). Only spend groceries using the cash in the envelope devoted to groceries. It’s a great way to keep your spending in check. Save any cash you don’t spend, of course. 

You can also use cash for everything and put every variable expense category in cash envelopes at the beginning of each month. Again, at the end of the month, save any cash that you haven’t spent.

3. Use An App!

If you are having a hard time with pen and paper or excel, use an app! For instance, Digit is a great app to use to save some money. The app automatically analyzes your spending habits and saves the perfect amount for you each day. Status is a great way to stay on track with help from your friends. The app allows you to share finances tips, compare your finances, and help you manage your money. Truebill helps track your bills and cancel recurring charges as well as find those old subscriptions you forgot about (and really don’t need anymore!).

Trying any of these saving methods will help save you some serious cash. 

What Is Debt Consolidation?

Debt consolidation is something you hear people trying to get out of debt talk about a lot. Debt consolidation is when someone rolls high-interest debts like credit bills into a single payment — usually with a lower interest rate. That lower interest rate is what is key because that is what will ultimately reduce the total of what someone ends up paying on their debts. Reducing the total means they’ll pay less overall and be able to get out of debt faster.

For a lot of people this ends up being a real life saver. Let’s say someone takes out a loan for two years, pays off their credit card debts, and then makes their loan payments on time every month. In that scenario that person knows that they are going to be out of debt in two years. The same can’t be said for someone making payments on a credit card every month.

So How Much Can Someone Save?

The easiest way to figure out how much you can save is to head over to Fiona, a search, comparison and recommendation engine for personal loans.

It’s really simple on Fiona to figure out what loans are available to you. Fill out a few simple questions about yourself (like, really simple) and then get matched with personal loan offers in less than 60 seconds.

That’s when you’ll see a list of lenders (Fiona works with all of the big lenders, too), the interest rate you are eligible for, how long the term of the loan is for, and also what your monthly payment will be.

From there you will be able to see how much money you will be saving by consolidating debts. Seriously, Fiona is one of the easiest ways we’ve found to figure this out.

Can I Bargain On My Debts?

It really depends on what kind of debt you have.

Some credit card companies might allow you to negotiate on how much you owe, particularly if you have a lump amount that you are able to put towards your debts immediately.

Collection agencies also might allow you to bargain. Collection agencies routinely purchase old debts for pennies on the dollar. So, even if you settle an account out for 30% to 50% of the original balance, the debt collector will still likely be making a nice profit which is exactly why it is possible to negotiate with debt collectors.

To score the lowest settlement possible, it helps to have a plan in place before you pick up the phone to give the debt collector or creditor a call. A few tips to do just that:

Know how much you can afford to pay in one lump sum.

Ask how much the company is willing to accept as a settlement in full before you make your first offer.

Don’t be afraid to counteroffer multiple times until you reach an amount you’re comfortable paying.

Be willing to call back later to try to get a better deal.

Get the offer in writing before you pay. No exceptions, and remember, it never hurts to ask.

Remember: You Aren’t Alone

Paying off debt is really hard. It can be an isolating experience for some people, especially if you are watching your friends buy cars or even houses and you feel like you are being left behind. But have no fear! You can and will pay off debt. Here are a few wonderful stories from folks who paid off their debt to help keep you motivated.

Madalyn Gray is a self-described shopaholic who was able to climb her way out of $44,000 of debt.

Kayla and her husband are currently tackling $145,000 of debt.

Melanie Anderson paid off her student loans as a SAHM.

Bernadette Joy Maulion paid off over $300,000 of debt in just three years and is now completely debt free including the mortgage.

Most importantly, don’t forget to join The Money Manual’s Facebook Group, Let’s Talk About Debt, a community built around helping people get out of debt. You can get out of debt, and there’s nothing wrong with asking for some help along the way!

Feature Image: Twenty20

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