1. Reflect on how you got into debt.
Traditional advice tells you not to dwell on the past, but in this case, it’s necessary. Getting out of debt requires that you change the habits or circumstances that led you to debt in the first place.
Often, people wind up in debt because they overindulged and overborrowed. However, this isn’t the case for everyone. Many people have medical debt stemming from uncovered medical procedures. You may have debt due to divorce. The goal is to recognize what led to your debt so you can take steps to prevent the same thing from happening again.
2. Change your bad spending habits.
Stop spending too much money, create a budget, and start an emergency fund. Bring your spending into control by tracking all your expenses for at least a month. Then, put your expenses into categories and total up each category. This lets you know exactly where your money is going. You can optionally calculate a percentage for each category so you can judge how much of your income is going toward housing expenses, gas, food, etc. To calculate a percentage, divide the each category amount by the total monthly spending.
Once you’ve analyzed your spending it’s time to make changes to where your money goes. If it seems like you’re spending an abnormal amount of money in any category, look for ways to cut back on that expense. For example, if more than 25% of your income is going toward food, you should figure out how you can reduce your food costs. Here’s an example of how you can allocate your monthly expenses.
3. Figure out how much debt you have.Up until now, you’ve probably remained oblivious to how much debt you really have. Now’s the time to face the reality of your debt. Make a list of all your debts, the amount you owe, the interest rate, and the minimum payment. Use recent billing statements, canceled checks or bank statements, and your credit report to get a complete list of everyone you owe.
4. Decide how you can get extra money to pay off your debt.If you’re currently paying the minimum every month, it will take you several years, maybe even decades to finally pay off your debt. To pay off your debt much faster, you’ll have to send more than the minimum payment to at least one of your accounts each month. Get creative in how you come up with the extra money by cutting back on your current expenses and by looking for ways to increase your income.
5. Put together a plan.
A debt plan doesn’t have to be complex. All you really need to do is prioritize your debts, either by interest rate or by the balance or some other criteria that you choose. Then, decide how much you’re going to pay every month. It’s typically best to make a lump-sum payment to one of your debts while paying the minimum on all the other accounts. Then, once you’ve paid off one debt, redirect your lump-sum payment to the next debt on your list.
You can see your plan will play out by using a debt repayment calculator. Some let you enter a specific monthly payment or a debt-free deadline to customize your repayment plan.
6. Pay off your debt.
With a plan and a monthly payment amount, what you have to do next is send your payments faithfully every month. This part of the plan will take the longest, several years depending on the amount of debt you have and the payments you make. You can accelerate your debt repayment by sending extra income toward your debt. For example, tax refunds and monetary gifts can be used to pay off your debt.
Creating debt milestones may help you stay motivated in paying off your debt. By celebrating the small successes, like paying off 10% or 25% of your debt, you realize the progress you’re making and stay motivated.