Getting out of debt is a concern for many of us.
Whether you got into debt during College, during a tough time in your life, or simply due to bad choices, you need to pay off debt to improve your finances.
There are many strategies to pay off debt fast.
However, some tips are so important they should be considered no matter your situation.
After reading this post, you will be able to put a strategy in place to get out of debt and start accumulating wealth.
Are you ready to change your mindset towards money?
If so, enjoy the reading!
Pin for Later 📍
1. Know your numbers
This first step is often the most difficult mentally.
Indeed, some people are so indebted that they rather ignore the situation so they don’t have to deal with it.
They don’t know the exact amount of debt they have, which is a huge mistake!
If that’s your case, hear me out.
Burying your head in the sand is not an effective strategy for dealing with your problems.
It is also true when it comes to money.
Be courageous. Accept that you are in a difficult situation and that (maybe) it’s nobody’s fault but your own.
Accepting to face a problem is always the first step to solving it.
When I discuss this point with people in serious debt, they often tell me they don’t know how much they owe. They don’t think they can fix the situation shortly (and sometimes they can’t), so they think they are saving themselves a lot of stress by not facing the numbers.
And as you can imagine… This is a mistake!
Firstly, it will be difficult to dispute mistakes or excessive fees (and these happen often).
Secondly, to deal with a problem and solve it, one must first understand its magnitude.
That’s why, whether your goal is to pay off debt next or next year, you should know exactly how much you owe at the beginning of each month.
You need to track where you’re at to ensure your strategy remains valid.
I keep track of your debt and progress using Excel or do it on paper.
The important part is to know exactly how much you owe and update these figures every month.
2. Have a Budget
If you want to pay off debt, you need to spend less than what you earn.
To do so, you need first to know exactly how much you make and what your expenses cost you.
The idea is to first list your income and then your fixed expenses, such as your rent/mortgage, phone bill, health insurance, budgeted groceries, etc.
At this point, do not include your debt (except your mortgage).
This will give you an overview of your monthly income and expenses before short and mid-term debt.
Once this step is completed, list your debt, starting with the smallest balance.
This section should include your loans and credit card debt.
Finally, in a third section, include very short-term debt due in 30 days or less.
This quick process will give you an overview of your income/expenses ratio.
You will have to work on this ratio to pay off debt and build wealth.
Needing help to create a budget you can live by? This step-by-step guide will help you.
3. Renegotiate expenses included in the first section
Expenses included in this section are recurrent expenses, and you will have to pay every month for a long time.
So saving a few bucks here and there can have a big long-term impact.
Are you sure you cannot get a better offer by changing your health insurance or negotiating your credit card interest rates?
Take a few minutes to check offers from other providers online. It’s worth a try.
Be aware that some companies, such as BillFixers can do this for you and negotiate a price reduction for some of your expenses.
In their case, the company charges 50% of the saved amount during the first year. The savings negotiated after the first year are all yours. Isn’t that great?
Other companies and websites like MoneysavingExperts give great advice on how to negotiate discounts and great deals. They also list the companies that usually accept negotiations.
The companies listed are mostly from the UK, but they also give lots of tips on saving money, which apply wherever you live.
4. Choose between the Snowball or the Avalanche Method
It’s now time to define exactly how much money you can allocate to paying off every month.
The idea here is to define a realistic amount to make sure you can respect your budget and avoid accumulating additional debt.
After defining the total amount, pay attention to the minimum payments for each debt.
You will have to focus on one debt first to pay it off as quickly as possible. The method you choose will have an impact on the first debt to pay.
If all your debts have about the same interest rate, the recommended method is the snowball.
Under the snowball method, you will need to list all of your debts (excluding your mortgage) in ascending order.
The goal is to pay off the smallest debt first and end with the largest one. You should pay the minimum amount on all of your debt except the smallest one, as it is the one you want to pay as quickly as possible.
On the other hand, if one of your debts has a much higher interest rate than the others, then the avalanche method may be more effective as it might allow you to save money on interest.
To make things clearer, here is a quick example.
Let’s say that based on your budget, you have defined that you can use $1,200 per month to pay off debt. Here is what your payment plan should look like with the Snowball method :
As a reminder, the avalanche method will require you to list your debts, starting with the highest interest rate and ending with the lowest one.
This method is particularly recommended when some of the rates charged are much higher than the average.
You will then save money by focusing on the higher interest rates.
This being said, the method that applies in most cases is the snowball method. This method is also very effective because it is more motivating.
You will see your debts decrease by paying off your smallest debts first, but you will also see the number of creditors decrease quickly. You will feel like you are making rapid progress, which is an important source of motivation.
Unless your income or some of your expenses from section 1 change, the total allocated to paying off debt should not change from one month to another.
Only the allocation of the money between the debt within the section will change.
5. Limit unnecessary expenses
Limiting expenses in the last section is key to paying off debt faster.
Some Finance gurus recommend completely avoiding this kind of debt as it does not answer any basic needs.
It often represents futile and compulsive spending.
Nevertheless, I do not recommend eliminating this so-called “futile” spending if you plan to pay off your debt in more than 1 year.
This is a personal choice, and I may antagonize some people by saying this.
However, be aware that keeping a budget to reach your goals is important in this process.
Respecting your budget will have to become a long-term habit to then be able to build wealth.
If your budget and goals are too restrictive, you won’t be able to keep them for too long.
This will increase the risk of failure because you will accumulate small deviations over time, and you will no longer be able to stick to your budget.
Have you ever said to yourself, “I’ll pay with my credit card. It’s just $150”?
And did you use your credit card several times after that?
This kind of pattern happens quite often. We think that a small expense can’t hurt us and that we will pay it back quickly.
The problem is that this expense will often lead to additional expenses.
This is why it’s recommended to allocate a reasonable amount for these little indulgences every month.
Your mindset toward money will be healthier, and you will keep these good habits for the rest of your life.
6. Automate your payments
Consistency is key to defining new habits, which is also true when it comes to money management.
Automating your payments will make your life much easier.
The first advantage of automated payments is that you will no longer have to think about preparing your payments every single month.
This trick will save you a lot of time.
Another important aspect is that it will significantly decrease the risk of forgetting about some bills and paying penalty fees.
7. Automate your savings
There is an important debate about saving money while paying down debt.
For some people, the priority should be to pay off debts as quickly as possible.
To do this, one should cut back on all unnecessary expenses and put as much money as possible into paying off debts every month. This method does not allow you to save money.
Accumulating new debt while paying off others is counterproductive and can also be demotivating.
That’s why paying off debt as quickly as possible without having any savings is very risky.
Because you will have to use your credit cards if you have unexpected expenses.
And you already know, using credit cards while trying to pay them off is a huge no-no.
To change our relationship with money, we also need to understand that credit cards carry many risks, although they remain a great invention.
According to Ramseysolutions, one in ten Americans will never pay off their credit card debt in their lifetime!
Not saving any money because you have a credit card you can use in case of emergency is not a sound strategy.
This is why you should automate your payments and savings.
8. Ask for a raise or look for new income streams
Many people have debt not because they are bad at Personal Finance but because they don’t make enough money.
According to Columbia University, in 2020, 55 million Americans were living in poverty.
Between May and September 2020, only 8 million people entered poverty in the US.
These figures are terrible, and they represent a general trend.
In Switzerland, the poverty rate is 6.6%, which may not seem like much. However, 13.5% of the population is also considered at risk of poverty.
This is surprising since Switzerland is often considered a rich country. Adding up these figures, over 20% of the Swiss population is at risk.
This shows how real the risk of poverty is and how it can be independent of a country’s economy.
Another interesting fact is that, in Switzerland, 4.2% of the working population is considered poor.
In the United States, 10.5% of the population is in this situation.
Unfortunately, not everyone can change jobs or ask for a raise. Nevertheless, it is important to look for solutions and ask for help.
When did you ask for a raise last time? If you can’t get a raise at your current job, can you consider changing jobs to earn more? Or maybe starting a side hustle?
If you can’t make ends meet no matter how hard you budget, increasing your income is imperative to improving your finances.
9. Never pay full price!
You can get discounts on literally everything.
And once you understand this, you will save a ton of money.
Comparing prices before making purchases will make you realize how much prices can differ from one seller to another.
And all of a sudden, paying full price feels like a scam.
Why would you pay full price when you can get big discounts?
Comparing sellers and waiting for things to go on sale will save you a lot of money.
Money which you will then be able to allocate to your debt repayment to get out of debt faster.
10. Refinance existing loans
Getting new debt when trying to pay off existing debt might seem counterproductive, but it can actually make you save a lot of money in interest.
If you got your student or car loan long ago, you might consider refinancing it to get a better rate.
Chances are that you can get a better rate if your credit score improved, which will save you a lot of money.
Getting out of debt is key to improving your finances.
It’s a slow process, but it is definitely worth it considering the opportunities better finances will offer you.
Start working on your finances ASAP, implementing one personal finance tip at a time.
This process should also motivate you to improve your financial literacy, which is the secret to financial freedom.
Are you ready to improve your finances? If so, start today using the free resources below!