How is debt accumulated? Some people accumulate debt due to unforeseen circumstances such as medical bills or job layoffs. However, some debts are acquired by financing trendy lifestyles.
Some people purchase items that will cause them to live outside of their means. Some people buy due to their emotion attachment to a certain brands or they have a case of shining object syndrome. Then others, try to keep up with the current trends on social media.
People will also unnecessarily buy because they want to keep up with others. Sometimes this type of behavior can cause debt to spiral out of control.
I’m glad you are here, and you have made the conscious decision to eliminate your debt.
Are you ready to explore the 10 steps to get out of debt forever?
1. Create a plan
When you first decide to eliminate your debt, it is crucial that you create a plan that will work for you. All debt plans are not created equal. You have to create a plan that is suitable for you and your lifestyle.
To get started, you should make a list of all your debt. This would include your expenses like a credit card, loans (any type) and medical bills. When creating this list make sure you include your interest rate and minimum payment.
Once your list is made have you should decide which method you want to use to pay off your debt.
- Debt Snowball: This method starts by paying off the smallest debt first. This is the method we use to pay down our debt. You can read more here.
- Highest Interest Debt: This is when you take the debt with the highest interest rate and you eliminate it first. When thinking about this method it makes sense mathematically to choose this option.
We chose the debt snowball because we wanted to see our progress quicker. With this method you start with your smallest debt first. You pay the minimum allowed on your other accumulated debt.
Once you have eliminated your smallest debt, you simply rinse and repeat this process. However, you take the amount you paid towards the eliminated debt and you apply that full amount to your next lowest debt.
You can choose the debt snowball plan or the highest interest rate plan. Both methods will work. All you have to do is choose a method and stay focused on your end goal.
2. Start a savings account
I know this may sound weird, but it is equally important to build a savings while you are eliminating debt. When you don’t have money saved, it’s so easy to use credit cards to buy items you might need. Sometimes you might have to take out personal loan for major repairs to your home or automobile.
I would recommend that you get started with at least $1,000. This will allow you have money saved for unforeseen emergencies. This will also prevent you from accumulating new debt.
If you have to use your emergency fund remember you still need to rebuild that account. Once all your debt is eliminated, you can increase the amount of money you are putting towards your savings account.
3. No new debt accumulation
You have to make a conscious decision to not use your credit cards or apply for new loans. There is no way to get out of debt by accumulating more debt. You can cut up your credit cards or you can put them into a plastic bag and froze it.
You have to decide which one will stop you from using your credit cards whenever you get the urge to spend money. If you don’t all your efforts will be in vain. Let’s be honest here for a second, you simply cannot create new debt while trying to pay off old debt.
4. Trim your budget
You need to take a look at good look at your budget to see if you can trim some of your expenses. This will allow extra money to be paid towards the balance of your smallest debt. When I started to get the hang of budgeting, I made some tough decisions and trimmed down on some of my expenses.
We personally eliminated some cash flow to the following expenses; entertainment, food (restaurants, brand vs generic products and take-out), beauty services and subscription services. You and your partner can discuss the areas in your budget that could be trimmed down more.
5. Celebrate Each Milestone
When you start budgeting it will seem difficult. However, if you stay the course and celebrate each milestone your mindset will slowly change. As you begin to pay off your debt you should celebrate each hurdle you complete.
I have personally found that celebrating mentally prepares me for the next milestone. You can allow yourself a small reward that you can afford with cash. Just make sure to not overspend if you decide to spend cash for your celebration.
6. Extra cash flow
Our family used our extra cash to help eliminate debt quicker. I can say using extra money was the push we needed to get across the finish line when we first started our journey. If you work and receive yearly bonuses you can use that money to pay down your balances.
You can also use your tax refund to pay down your debt.
When you’re on the road to debt recovery any extra money should be used to deplete your debt payments.
7. Part time job
If you have already reviewed your budget and determine that there’s no other option that allows you to save money, then consider a side hustle. There are a lot of different opportunities you can take advantage of by working from home or in your local community.
If you want to eliminate your debt faster, you may need to seek opportunities that allow you to work part-time. Some people take their used items and sell them on sites like eBay, Poshmark, Offerup and Facebook Marketplace. Remember the more money you have at your disposal the quicker you will be able to eliminate your debt.
8. Net Worth
Do you know what your net worth is? If not, sit down with your partner and discuss your family net worth. The best way to explain your net worth is to take your assets that you own and subtract your liabilities.
Here’s an example using a house. An appraisal was completed on your home and the appraised value is showing 300,000. You would then need to find out how much you have remaining on your home, let’s just say 200,000. Then for this home your net worth would be 100,000.
Once you have a clear picture regarding your net worth you will be able to understand your current financial status.
9. Moment of truth
Sometimes it can be hard to sit down and reflect over your past mistakes. However, it’s necessary for growth.
- The first question you should ask yourself, what caused this debt? You have to be honest with yourself and be willing to learn from it.
- The next question should be how can I avoid this type of mistake in the future?
Shopping and using credit cards can be an addictive behavior. I have found that discussing my debt goals with an accountability partner helps to stay consistent with your goals. Remember mistakes might happen along this journey but it shouldn’t stop your progress.
10. How long should it take
Most people are eager to know how long it will it take to pay off their debt. The answer will vary for everyone. There are a lot of factors to consider that will make your journey different from others.
Some people may receive a 20,000 bonus from work, while others might receive nothing. The same is true for tax refunds. Some people may owe taxes while others receive 8,000.
You have to remember that your finances and debt will be different from others. Debt does not didn’t accumulate overnight most of the time, so don’t except for it to magically disappear overnight. However, you could inherit some money or win the lottery.
You will read stories everyday about people paying off debt faster than others. Those types of stories should be used for inspiration. Regardless of the amount of debt you have, with focus and determination you can achieve your financial goals.