Updated: Aug 4, 2019
Getting into debt, especially credit card debt, is not something most people do intentionally. Often people find themselves with a low bank balance and an unexpected emergency expense, such as a car repair, and take on debt to get through the emergency. If you find yourself with bad debt, facing debt collectors and mounting bills, you may feel like you have no way out. However, it is possible to become debt free! Don’t wait to breathe the fresh air of fiscal freedom without the chains of debt and collections weighing you down. Stop looking like this guy and start paying off your debt today following these steps:
1. Identify and rectify problem areas in life. Pinpoint the reason(s) why you went into debt in the first place. Was it overspending due to stress? If so, find other ways to relieve stress, like exercising or taking up a low-cost hobby. Is it due to a toxic relationship? Get out of it immediately, leaning on your trusted friends and family for support. Drinking heavily, taking drugs, or smoking, all of which are expensive and addictive habits? Seek help though many rehab or quitting programs, such as Alcoholics Anonymous. Identifying problem areas at the very beginning of your process to get out of debt will help you avoid new debt as you pay off your current debt and in the future.
2. Create a budget. Create a budget that lists all necessary expenses: rent/mortgage, electric, groceries, and minimum loans payments to figure out how much you must spend each month in order to stop going further into debt.
3. Eliminate spending on all unnecessary purchases. Identify all unnecessary expenses: television, magazine subscriptions, gym memberships, eating out at restaurants, alcoholic beverages, and internet (Note: internet may be a necessary expense if you use it for school or work, but if it’s just for watching Netflix or checking Twitter, it’s unnecessary). Look through all of your credit card statements to make sure you aren’t unknowingly spending money elsewhere, like a Spotify subscription you never use. To cut spending even more, check out 60+ Ways to Save More Money.
4. Create an emergency fund. After each paycheck, put whatever is leftover after paying all necessary expenses into a savings account. Do this until you have saved $1000, and do it as quickly as possible! If you have things lying around the house that you can sell (old books, video games, clothes, furniture, etc.), sell them. This is your emergency fund, which will help you cover emergency expenses as you start paying off your debt in order to avoid new debt.
5. Pay off bad debt using the “debt avalanche”. Basically, list your bad debt (e.g., high interest student loans, credit card debt, payday loans, collections, car loans) from highest interest rate to lowest interest rate. While making minimum payments on all of your debts, put whatever amount you were putting into your emergency fund in Step 4 towards the loan with the highest interest rate until it is paid off. Once the top debt is paid off in full, move to the next debt. Keep doing this until all of your debts are paid off.
6. Now that you are free of bad debt, take it one step further! Save 15% of your income to a retirement account, such as a Roth IRA, and then pay off all other debt, including your mortgage. Once you make it to this step, you are free from the burden of debt and living life as it was meant to be lived. Enjoy!
If you’ve held a lot of bad debt and found a way to pay it off, we want to hear from you! What did you do that made it possible to become debt free?