How to get out of debt

Getting out of debt and staying out of debt is not an easy thing to do. Chances are, you’re reading this article because you’ve already amassed a fair amount of debt and are thinking it will be impossible to ever get out from under it all. Learn how to stop incurring new debt.

Steps

1. Record your spending. The idea of writing down what you spend is a concept most people find annoying at best and useless at worst. However, this is actually your KEY to getting out of debt. You’re in debt because you spent money you didn’t have.

If you’re like many people, your debt didn’t come from one single huge purchase, it was trickles of spending amassed over time. Avoiding more debt starts with knowing what you are spending your money on.

Each day for one month (at least) write down every penny you spend, no matter how small.

2. Categorize your spending. After you have a month’s worth of spending written down, categorize your spending into logical groups. By doing this, you’ll have a good idea of what you spend your money on and will help you figure out where you might need to cut back on spending.

3. Make a budget based on your spending record. Write down the amount you spent in each category of spending last month as your budget for spending for the next month.

Don’t sweat if you feel like the amount is too much. We’ll get to that next. For now, just write it down. If you spent $250 on clothes last month, write it down. If you spent $200 on gas for your car last month, write it down.
4. Figure out your debt paydown fund amount. Looking at your new budget, you’re going to be able to see areas where you might be able to cut back. You might ALSO see categories where you need to increase spending.

In doing this step, no one is suggesting that you come up with budget amounts that are unlivable. Think about going on a diet–if you try to restrict your calories excessively, what’s the first thing you want to do? Krispy Kreme here you come, right?

The key here is to be realistic. Are you paying money for a gym membership you never use, despite your best intentions? What about the $4 a day, every day, morning coffee you get before work, or your 5-cans-of-diet-coke-a-day habit?

Chances are, your budget has some fat that can be trimmed. Only you can know what’s essential to you and what can be cut out, but if you’re honest with yourself, chances are you will be able to take some money out of your spending that you will be able to put against your debt, without ever missing it.

At the end of this exercise, you should have come up with a figure, a number of dollars that can be put toward debt paydown.

Make a note of this figure.

Day-to-day, if you don’t want to keep taking note of all your expenditures, just write down what you spend in the categories you are trying to cut back. This will give you a very clear idea of how well you are doing, and it may help you decide to hold back on a purchase, if you know you’re going to go over your budgeted amount.

5. Figure out how much you owe, to whom, and on what terms. Debt can often feel overwhelming because you really don’t have a clear idea of how much in debt you really are. Gather your bills, and make a simple list or spreadsheet of all the debts you have.

Write down all the pertinent facts, including name of the creditor, your total balance, your minimum monthly payment, and your interest rate.

6. Start paying it off. Take the debt paydown figure of money you trimmed from your budget in step 4, and apply it to debt repayment.

It’s a good idea to prioritize the debts to which you are going to apply this extra money. Do you have debts that are past due and the creditors are hanging out on your door step demanding your first-born? Do you have debts with exceedingly high interest rates? Consider these top priorities.

Let’s say you determined in Step 4 that you could comfortably trim an extra $250 from your monthly budget to go toward paying debts, and that from your list of debts in Step 5, you owe $2,000 on a store credit card that has an interest rate of 19.5%, you owe $1,000 on a Visa with an interest rate of 11.5% and $25,000 in student loans with an interest rate of 5%. You would want to pay the minimum on your low interest rate debts, and apply the bulk of your $250 to the highest interest rate, in this case, your 19.5% Visa, despite the fact that the actual cost of the student loan interest is highest.

For more information about dealing with late payments, or if you’re in a bigger financial mess than these steps take into account, see tips below.

7. Wash, rinse, repeat. Just kidding, but you get the idea. This process gets easier. Once you’ve figured out your spending and what debts you owe, keeping it up gets easier and easier. You’ll refine your budget over time, increase the amount of money you can pay yourself (see tip below) and the amount you can put toward debt. Continue to pay off each debt in your priority list.
8. Don’t give up. Chances are you didn’t get into debt in a day, and you won’t get out of debt in a day. Quick fixes don’t last, but learning how to manage your money can bring great peace into your life, and you can spend your mental energies on more fun things.

Tips

* Don’t consider debt consolidation or consumer credit counseling agencies your first stop. These should be a last resort! Although they may be tempting, if you’re going to get your act together, doing it on your own will help you learn the skills you need to fix your own problem and avoid getting in this situation again.
* If creditors are hounding you, and you have grown fearful of answering your phone or reading your mail, stop and take a deep breath. You are OKAY. You will be OKAY. Now, take another deep breath and CALL THEM. Most creditors want to work with you and figure out a way to get things sorted out. When you take the initiative to call and explain yourself, you may find them willing to help and may find they offer you terms that can help you get the debt back under control.
* Pay yourself first. Many people in debt put their creditors first and themselves last. Create a budget category for a “contingency fund” to help create a cushion for yourself for spending. The wise owl articles you’ll read will say this cushion should have 3-6 months of expenses in it. Don’t get overwhemed by this. Setting aside something, anything, for unexpected expenses is a great start.
* Consider resources at your disposal to pay down debt if your debt is more than you can afford each month, or if you could stand to reduce the amount of interest you are paying out. Do you have equity in your home? A home equity loan carries a low interest rate and, in most cases, the interest is tax-deductible. The same can’t be said of your high interest credit card debt. However, dont forget that credit card debt is unsecured debt, while home equity loans are secured debt. That means that with a home equity loan, your house is now at risk.
* Can you earn more? Most people can figure out a way to bring in more income relatively painlessly. Do you have a skill or a hobby from which you could earn some income? If so, this money could be put directly toward debt, and might build an entirely new stream of income potential for you over time.
* If you truly feel you need support, consider joining a local group of Debtors Anonymous. Debtors Anonymous is a 12-step program for people who have trouble with debt and spending and can be a source of great support and inspiration for you if money management is a habitual problem in your life. See the links below.
* You are allowed a free credit report from each of the three companies every 12 months through annual credit report.com.

Warnings

* Avoid the temptation of payday advance loans at all costs. There are other solutions. It’s a quick “fix” that will cause you to get into a snowballing problem of debt. Before you even think about taking out a payday loan, consider other resources: family and friends, home equity, and Debtors Anonymous.
* Chronic spending and debt can be a harmful habit, just like alcoholism or any other addiction. Spending can be an escape, or can be used to mask deeper issues. Consult a professional and/or Debtors Anonymous if you feel you might have a problem.