- Start by taking inventory of all your outstanding debts.- Look for ways to maximize your disposable income so you can put more money towards your debt repayments.- Choose a payoff strategy, such as the snowball or avalanche method.- Explore other options like debt management plans, debt consolidation,
debt settlement and filing bankruptcy.- Avoid common pitfalls like giving up too soon and not correcting the behaviors that led to the debt.
1. Tally Up Your Debts
Before creating a strategic plan to get out of debt, you need to fully understand the problem."Take a moment to list out every debt you have – credit cards, loans, personal debt – and write down the interest rates, balances and monthly minimum payments,this will give you a clear picture of your debt and help you determine the best way to pay it down.
2. Review Your Budget
With a thorough understanding of your debts, the next step is to review your budget. "Track your income, your must-have expenses and what’s left for debt repayment," Ensure everything is up to date so your estimates are as accurate as possible. The difference between your income and expenses is your disposable income, which is the money you can use for extra debt repayments.How to Make a Budget – and Stick to It.
3. Maximize Your Disposable Income
Experts recommend reviewing your budget and finding ways to maximize your disposable income by increasing your income or reducing your expenses."Sometimes there is nothing you can cut, but it never hurts to check. For example, can you find a cheaper cell phone bill or car insurance?" Higher-income individuals can also face challenges, though, such as needing to reverse lifestyle creep and sacrifice creature comforts."When trying to get rid of debt and reduce expenses in your budget, getting rid of convenience items can be difficult if you are used to them. But if you're set on getting rid of debt, being realistic about what you can reduce and eliminate is important, You'll also want to consider if you can increase your income while you're repaying the debt."Working an extra job or doing a side gig can be the best way to make additional money," Morgan said. But burnout is a real risk so it's important to be honest about what's sustainable. "Working 80 hours per week can typically happen for a period of time, but you will burn yourself out."
4. Dangle the Carrot
Paying off debt is not nearly as fun or easy as accumulating it. The process often requires prolonged sacrifice, which can test your discipline and patience.setting goals beyond just getting debt-free. "For example, if you have a goal to be debt-free in a year, you should also be thinking about what you want to do after that year,Take time to think about how you want to spend the extra money once the debt is gone. Would you take a celebratory vacation, build your emergency fund or invest more in your retirement?"Having a goal makes it easier to continue when things get difficult," actual, tangible benefits that will come from paying off the debt.
5. Pick Your Payoff Method
Next, decide how you're going to pay off your debt. Two popular DIY approaches are the snowball method and the avalanche method. With both, you make the minimum payment on all your debts and put all your extra money toward one debt at a time. The difference between the two, however, is which debt you prioritize.With the snowball method, you prioritize the smallest debt to gain momentum and get quick wins. With the avalanche method, you prioritize the highest-interest debt, saving you more money in the long run."These methods both work, but the avalanche method is usually geared toward someone who is motivated most by saving interest each month, and the snowball method is geared towards someone who wants to see quick progress,"On the other hand, if you'd like support and guidance with your debt payoff, you can consider a debt management plan (DMP). DMPs are structured payment plans, often managed by credit counseling agencies.A credit counselor typically assesses your situation and contacts your creditors to try to negotiate lower payments and interest rates. You then make monthly payments to your credit counselor and they pay your creditors for you.
6. Consider Debt Consolidation
Debt consolidation is also worth considering. "If you’re juggling a bunch of debt, consolidating all of your credit cards and personal loans into one single loan could simplify the debt-payoff process," For example, if you have three credit cards with APRs of around 30%, paying them off with a personal loan that has an APR of 12% would eliminate two monthly payments right away. Additionally, it could cut your costs – although that'll depend on the repayment term of the personal loan.If you go this route, shop around and compare the interest rates, fees, monthly payments and total costs of your current credit products to the debt consolidation options you can get. The monthly payment amounts or APRs alone won't tell you the whole story.
7. Know the Last Resort Options
If you're overwhelmed and can't afford to pay off your debt using the above methods, you may want to consider alternatives like
debt settlement or even filing bankruptcy.
