Debt can be overwhelming and it can be easy to just ignore it. However, the longer you put it off the more it will continue to accrue. With the right plan and discipline, you can regain control of your finances and pave the way to a debt-free future. Whether you’re dealing with credit card debt, student loans, or personal loans, here’s a comprehensive guide to help you get out of debt and achieve financial freedom.

1. Understand your situation

The first step to getting out of debt is figuring out how much you owe, and what the interest rate is for each piece of debt. Create a list of your debts that you want to pay down and write down the following:

• Total balance owed
• Interest rate
• Minimum monthly payment

This list will be essential to your plan to get out of debt. You don’t necessarily have to aggressively pay down lower interest rate debts (<5%), such as mortgages, if you have them. This is because typically you can achieve a higher return in the stock market than the interest rates on your loans. But things like credit card debt which can have interest rates of 20% or more should be paid down aggressively.

2. Stop accumulating new debt

While it’s better to not get into high interest debt in the first place, we can’t change what’s already happened. It becomes exponentially harder to get out of debt if you’re continuing to add to it. Stop using credit cards and avoid taking on new loans, such as for a car or house. While mortgages are typically seen as “good debt” and help you buy a house, you should make sure your financial habits and health are improved before buying a house or car.

Focus on living within your means and only spending money you actually have. 

3. Stick to a smart budget

Sticking to a budget is essential to paying down your debt. It ensures that you are not spending more money than you’re bringing in every month, which means you won’t be accumulating more debt. But simply not accumulating debt is not enough to get out of debt. You need to have money to actually pay down the debt, which you should budget for.

Track your income and expenses, using tools like Empower or Rocket Money, to identify areas where you can cut back and stick to a smart budget. Depending on the extent of your debts, it may be wise to cut back heavily on your discretionary spending. We have discussed the 50/30/20 budgeting method in the past, which allocates 20% to financial goals and 30% to wants. However, if you have a lot of debt it would be prudent to aim for a savings rate of 30% or more of your monthly take home pay, and cut spending on “wants” to 10% or even lower, depending on how extreme you want to get. This may be painful in the short term, but it will pay off greatly in the long run, and gives you a good amount of money to start attacking your debt. 

4. Pay down the debt

There are two popular methodologies for paying down debt:

• Debt Snowball Method: Pay off the debts from smallest to largest, while making minimum payments on the others. This method is useful for building motivation and the psychological benefit that you can get after paying off one piece of debt.
• Debt Avalanche Method: Pay off the debts from highest interest rate to lowest interest rate, while making minimum payments on the other debts. This will save you the most money over time, since the highest interest rate debts accrue more interest over time

Depending on the specific details of your debts, these methods may look very similar or very different. From a pure numbers perspective, the debt avalanche method is the best for paying the least amount of interest, but the mental benefits of paying off loans may make the debt snowball method more attractive. Pick the one that you will stick with and that enables you to follow through and pay off all your high interest debt.

5. Stay committed

Having a good plan and starting to pay down your debt means nothing if you don’t follow through. Depending on how much debt you have, this process could take months or even years. Make sure to stay committed to your goals and continue to keep chipping away at the debt. Be sure to celebrate your progress along the way and keep sight of your financial future.

Final Thoughts

Paying off high-interest rate debt is one of the best early financial moves you can make. By following these steps, staying committed, and prioritizing your financial well-being, you’ll be well on your way to paying off your debt.

Disclaimer: The content provided on this blog (Zooming to Fire) is for informational and educational purposes only. It represents the opinions and perspectives of the authors and should not be considered as financial advice. The authors are not licensed financial advisors, and no content on this blog should be in any way interpreted as professional financial counsel or advice. See more here.