Let’s face it, being in debt is stressful.
Debt has a way of hanging over your head, a constant reminder of poor financial decisions, unexpected expenses that popped up or legitimate expenses (like a mortgage?) that have now become a burden.
Being in debt usually means that you’ve spent above your means, whether the expenses were necessary or not.
So what can you do once you’ve determined that you no longer want to live under the dark cloud of debt? It’s time to take action and to start making strides towards making that debt disappear!
Today I want to take a brief look at some top strategies for getting out of debt.
We’ll look at what things you should be doing if you want to get out of debt, explore strategies to help you dump your debt, and do a quickie review of some of the popular debt reduction programs available.
Things You Should Be Doing To Get Out Of Debt
Once you determine that your debt is getting out of hand, what are some first steps that you should take to help stop the bleeding?
- Cut all unnecessary spending: Cut back on all of your un-necessary spending. Cancel your cable and magazine subscriptions, cut back on eating out, downgrade or cancel phone packages. Find all the areas where you can cut back and do it! Here are some ways to save money every month.
- Track all your spending: It’s easy to spend money in small chunks all month and not realize just how much you’re overspending. Small charges add up to large bills at the end of the month. Tracking your spending can help you to figure out just where your money leaks are, and stop the outward flow of cash. A good tool for doing this is an automated budget spreadsheet from Tiller money, we use it on a regular basis.
- Do a budget: Once you’ve tracked your spending for a month or two, and you know what your regular income and expenses are, it’s time to setup a budget. We use a software called You Need A Budget to do ours. Basically you just tell the software how much to budget for all your spending and saving categories every month, and then after you enter your receipts it will automatically tell you how much you have left in each category. If you overspend in certain areas it’ll let you know and you can adjust. Find a software or excel spreadsheet that works for you and get started on your budget!
- Save an emergency fund: Save up a small emergency fund of anywhere from $1000-2000 in order to keep you from going back into debt while you’re paying off debt.
- Set up a debt payment plan: Figure out a plan for paying back your debt. Whether it’s the debt snowball, DOLP snowball, the debt avalanche or some other program, the key is to get your ducks in a row, settle on a plan and start working hard to pay off your debt according to that plan.
- Find a part time job or side income: If you’re paying off debt, especially if it’s a large amount of debt, you may want to consider getting a part time or side jobs in order to help pay it off quicker. For me that meant starting a side business doing graphic design, and starting a blog. Here are some ideas of how to create more income.
When you’ve got debt the key is to realize that there is a problem there, debt shouldn’t be a normal part of your life. Start tracking your spending and set up a budget. Once you get some spending and saving guidelines in place and have chosen a debt dumping plan, it can help to increase your income and pay off the debt as fast as you can.
Strategies For Getting Out Of Debt
There are a lot of good ideas and strategies to employ while getting out of debt. Here are some of our favorites that we’ve used with success.
- Zero based budget: The zero based budget is a budget that basically assigns every dollar of income a job so that it’s either going to a giving, saving or spending category. No dollar is left unassigned. That way you don’t have situations where after your mortgage and utilities are paid for, the rest of the money just disappears into eating out, buying tech gadgets or other miscellaneous spending. Here’s a discussion of the zero based budget.
- Envelope budgeting: Envelope budgeting is a way to cut your spending by only spending cash out of “cash envelopes”. Here’s how it works. At the beginning of the month you go to the bank and get cash for all of your high spending or problem categories. You then put the money into cash envelopes for spending and tracking purposes. When the money in the envelope runs out you either have to take money from another envelope and spending category, or you do without. It forces you to stay within certain spending limits, and is very effective. Read about cash envelopes in more depth here: A Way To Control Spending: The Cash Envelope System.
- Debt snowball: There are several versions of the debt snowball. One of the more popular is the version espoused by Dave Ramsey where you order your debts from smallest to largest, pay minimums on all of the debts and then “snowball” all extra money towards the smallest debt first until it is paid off. Suze Orman’s snowball, sometimes called the debt avalanche, is similar except the debts are ordered by interest rate, and then paid off with highest interest first. David Bach on the other hand has The Done on Last Payment snowball where you take the minimum payments on a debt and divide by the total debt to see which debt would be paid off first. Then pay off in ascending order. Which debt reduction method is the best? The one that fits your mindset – and gets you out of debt!
- Debt rollover: Crown Financial’s Money Map program espouses what they call the “rollover” method for accelerated debt payoff. Very similar to the debt snowball where you order your debts from lowest to highest and pay them off in that order. Details of the Rollover method here.
Top Programs And Financial Gurus To Help You Get Out Of Debt
There are a thousand and one financial gurus out there ready and waiting to give you advice in their self help programs, books and financial programs. While a lot of them aren’t that great, there are a few that I would recommend.
Dave Ramsey – 7 Baby Steps And Financial Peace University
Dave Ramsey financial class, called Financial Peace University goes through 13 weeks of class instruction that will help to give you a good solid financial foundation. It will teach you about the importance of saving up an emergency fund to avoid going into further debt, of setting up a debt repayment plan (Ramsey’s debt snowball mentioned above), and of getting “gazelle intense” in order to pay off your debts. That may involve getting part time jobs (Dave likes to bring up the idea of delivering pizzas), canceling subscriptions you don’t need and selling “everything but the kids”. It may also involve downsizing.
Ramsey espouses what he calls the 7 baby steps to financial freedom, which includes paying off debt in step 2.
- Baby Step 1 – $1,000 to start an Emergency Fund
- Baby Step 2 – Pay off all debt using the Debt Snowball
- Baby Step 3 – 3 to 6 months of expenses in savings
- Baby Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
- Baby Step 5 – College funding for children
- Baby Step 6 – Pay off home early
- Baby Step 7 – Build wealth and give!
You can follow his baby steps plan by attending his Financial Peace University class, or reading his book “The Total Money Makeover“. Once you’re out of debt he also has an advanced class called “The Legacy Journey“.
Crown Financial – Crown Money Map
Crown Financial Ministries is a Christian based financial ministry that has been around for ages and helps people to find financial freedom via Biblically sound financial advice. They have a program similar to Ramsey’s FPU called the Crown Money Map. The program has 7 destinations along the road on their Money Map, and reaching those destinations means you’ll be further along the road to financial freedom and your final destination. Those destinations are:
- Destination 1: Emergency savings fund
- Destination 2: Credit cards paid off.
- Destination 3: Consumer debt paid off.
- Destination 4: Save for major purchases.
- Destination 5: Buy a home and begin investing.
- Destination 6: Home mortgage paid off.
- Final Destination: True financial freedom.
Pretty similar ideas to Ramsey’s 7 baby steps, with saving up an emergency fund, paying off debt using their “debt rollover” method and saving up cash for major purchases. Want to get started on their program? You can check out their monthly income and expenses spreadsheet here, and look into how to pay off your debt with their debt calculator here.
David Bach – Finish Rich Plan For Financial Freedom
I discovered David Bach a while back when I received one of his books in the mail in order to do a review. Bach has a book, Debt Free For Life: The Finish Rich Plan for Financial Freedom that gives detailed help in dumping debt. He is a regular on Oprah, the Today show and other major media as well.
Bach promotes his own debt payoff plan, The “Done on Last Payment” snowball. Basically you take the minimum payments on your debts and divide by the total debt to see which debt would be paid off first. Then pay off in ascending order.
I like David’s no-nonsense style, and his books are an easy read. Definitely one to check out if you don’t like the other two mentioned above, and he has a ton of free resources on his site, Finish Rich.
Getting Out Of Debt: Start Now
Getting out of debt isn’t rocket science, but it does take the will to get started and stick to it. You have to stop the outflow of money, put together a budget, save an emergency fund and put a debt repayment plan in place that will work for you.
There are a ton of options out there that can help you get started, and while they’re all a bit different, they’re all using similar ideas and principles to help you get out of debt. The key is to get a plan, put it in motion and stick with it for the long haul.
Are you trying to get out of debt? Which plan are you using? Already gotten out of debt? What plan did you use, and what strategies, programs and financial gurus helped you along the way?
DC @ Young Adult Money says
We have a ton of student loan debt, close to $80k (I haven’t checked the total in a while, probably will sometime this summer) and we pay approximately $1,000 a month. That’s minimum. Besides that, we have no other debt at this time so we are in a great position. We do plan on buying a house and we will need to replace at least one of our cars soon.
We currently do not use any of the plans you described. We plan to continue chipping at the student loan debt, build up emergency savings, max out our 401k, and do what we can to increase our monthly income.
I know in some situations people need to make drastic changes to get out of debt. I don’t think that’s the case with us. I also think if you have debt locked in at a low rate, you should instead get it exposed to the market because your return over time will (hopefully) be better than the rate you pay on your debt. Overall I advocate simple, smart moves (i.e. keep chipping away at your debt vs. making drastic changes) to get out of debt.
Peter Anderson says
I think in some situations it may be more of a long haul debt payoff, as in the case with large student loan debt, or with some mortgages. I know my student loan debt was around 20k back when I graduated (oh so long ago), and it was low interest, so I was going to hold off on paying it and make more in a savings account (back when you could). For a while I just paid my regular monthly payments, but after a while I got fed up with it and just got crazy on paying it off as fast as I could. I ended up paying it off within 8-9 months. It felt great to get rid of it and to have my mortgage be my only debt. So yeah, i completely understand, every situation is different. That’s why I wrote up above at one point that the best plan for getting out of debt is the one you actually do. Good luck!
We couldn’t make it w/out our envelopes. I had someone ask me if I was totally against credit cards and I said “Yes, for my husband and myself they do not work. We don’t know how to stop. Even debit cards are easy for us to get lost and forget to write in a receipt.” Cash in envelopes have been an answer to our prayer!
Mac Hildebrand says
I appreciate the time it took here to stack different approaches side-by-side and let readers know the strengths of each one as well as what would work best for them. The emphasis on the emergency fund is counter-intuitive for those who are stressed about their debt, but it’s great that Dave and you really make this a selling point to financial peace. I can imagine that the feeling of paying off those student loans in only 9 months was a great feeling! Chipping away at debt can work, but I’d imagine many will find the gazelle intensity a rewarding option.
Taka Sande says
This is a comprehensive article with practical advise! Financial discipline is critical to getting out of debt.
Tracey Waldherr says
I have 10,000 in credit card debt and I still owe 11,000 on my car loan. So my total of all my debt is 21,000. What should I start with