How To Get Out of Debt 101: The Guide to Paying Off Debt
A good percentage of people are in debt, but that doesn’t mean you need to be. Get yourself out of that hole, break the shackles off your neck and stop paying interest on your debt! It is extremely difficult to live a peaceful life when you know that there’s a heavy burden on your back. Paying off debt may seem like a never-ending task, but that is why I made this blog post!
It will be a difficult journey but trust me, a massive weight will be taken off your shoulders the moment you get rid of those nasty debts. You just need to fully commit to it and not give in to your personal wants.
In this blog post, I will walk you through the necessary steps when it comes to paying off debt!
You will learn:
- Diagnosing the true issue.
- 3 Methods for tackling your debt.
- Building the funds to pay off your debt.
- Other strategies to paying off debt.
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1. Diagnosing The True Issue
People will blame that debt and interest is the reason why they’re in the gutters, but in reality the “elephant in the room” is actually the individual.
If you don’t diagnose the main issue then for all you know, it will be an endless cycle of getting yourself out of debt, but only to find yourself falling back in.
To diagnose the problem, you need to ask yourself how you got into debt in the first place. Are you in debt because of student loans? Or was it because you took out a massive loan to satisfy your gambling addiction?
If the answer is something like the latter, then your priority should be to work on overcoming your addiction. I am not an expert when it comes to addictions so please speak to a professional, but excessive shopping, gambling, or drugs are common issues causing individuals to get into debt.
2. Debt Payoff Plans to Implement (3)
These methods are considered to be an accelerated debt repayment strategy because it only focuses on paying off all outstanding debt except your mortgage. These methods require you to pay your monthly expenses first and then use the extra cash to repay your current debt.
- Debt Avalanche (prioritizes interest rates)
- Debt Snowball (prioritizes balance owing)
- Or Debt Tsunami (prioritizes on emotional impact)
The Debt Avalanche Method
This plan requires you to focus your main attention on the debt with the highest interest rate (regardless of the amount in the balance). Make the minimum payment on the other debts and allocate the rest of the funds to the debt with the highest interest rate.
By making just the minimum payments on the other interest rates, it allows you to focus on the biggest rate first. Once you’ve paid off all of the balance of the highest rate, then you work your way down to the 2nd highest while still paying the minimum(s) of the other. Continue to do this until all debts have been paid off.
This leads to an “avalanche-like effect” going from the highest down to the lowest.
- Pro: The method requires you to pay the least interest on your accounts because you are paying off the highest interest rate first.
- Con: Can take a while to pay off all of your debts because you are tackling the biggest debt first. This could lead you to feel discouraged because you are still stuck on debt #1.
Example: Let’s assume you have debts with interest rates of 22.99%, 6%, and 10%. With the debt avalanche approach, you would tackle 22.99%, 10%, and then 6% last.
The Debt Snowball Method
Unlike the Debt Avalanche, the Debt Snowball puts a priority on the debt with the smallest balance first and working from the bottom up. Just like how a snowball is made, it starts off as a small ball and it forms to becoming bigger and bigger.
The small victories give individuals the momentum and motivation to continue paying off their debt.
- Pro: More likely to achieve small victories sooner. Makes you feel more confident. Easier to stay motivated.
- Con: Ends up paying more interest because you are not prioritizing the heavy hitters first. Your last debt will be your biggest, so it’s going to be a nightmare to overcome.
Example: Let’s assume you have debts with balances of $20,000 in student loans, $1000 in credit card debt, and $11,000 in car loans. You would first focus on paying off your credit card, the car loan and then the student loans.
The reason why this method is so important is that when it comes to debt repayment, it is not always about the math and the numbers; it’s the attitude when approaching debt. When you finish off paying off the debt of each account, it gives you that feeling of hope that pushes you to keep going.
Whereas in the Debt Avalanche method, it may seem that you are never going to be finished since it’s taking you so goddamn long to pay off your first hurdle– what ends up happening next is you giving up because you feel a sense of hopelessness.
The Debt Tsunami Method
Debt can be extremely stressful, especially when the debt is borrowed from a close one. Some examples could be
- Owing a family/friend money
- Still accruing interest on your student loans a decade after graduating.
- Taking out a personal loan for guilty pleasures like gambling or betting on sports games with your friends
Paying off your debts based on the emotional strain can help you feel more relieved. If the debts are really affecting your mental health then definitely consider paying off using Debt Tsunami!
List your debts from top to bottom with the heaviest burden at the top and least emotional impactful at the bottom. Then chip your way until you get to the bottom. Remember to make the minimum payments of all the other debts while you target the top emotionally draining.
- Pro: Will provide a greater sense of achievement and satisfaction
- Con: Can lead you to accrue the most interest or pay off the highest balance first.
3. Building The Funds to Pay Off Your Debts
Once you’ve figured out which plan to implement into paying off your debt, now you need the funds to pay them off. There are many things that you can do to build your funds.
- Work extra hours to accrue overtime pay.
- Find another part-time job
- Sell unused goods
- Live frugally until you can save up
- Lower your expenses
- Restrict eating and going out
These are some ideas on how you can build the funds to pay off your debt. Note that you don’t have to do this for your whole life. You can simply hustle until you are able to pay off all of your debts.
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- 20 SUPER EASY Ways to save money
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- How to Save Money on Groceries | Cutting Your Grocery Bill
- How to Earn 2.30% Interest on Your Savings
- Blogging as a Side-Hustle for Extra Income
4. Other Methods When Paying Off Debt
If building the funds to pay off your debt is extremely difficult then you can try one of these other methods when paying off debt. These methods will not always work and these should be used as a last resort.
Credit Card Balance Transfers
A balance transfer is when you transfer the owing balance of your current credit card to a “balance transfer credit card”. This new credit card should offer an introductory low, or even 0%, interest rate. You will be charged the regular interest rate once your promotional period ends.
Depending on the new card, you may be charged 0-3% on any transferred balance.
Credit card balance transfers are only delaying the interest accrued on your credit card, not getting rid of it. This is why you want to make it a goal to pay off your credit card balance as soon as possible.
Taking Out A Personal Loan
Taking on more debt may not seem like the best move, but it only makes financial sense to take a personal loan for your other debts when you are:
- Trying to gain a lower interest rate.
- Consolidating your debts into one
- Lowering your monthly payments
Crunch the numbers and read the fine print of your loan before you commit to this method. Most personal loans will charge you a 6% interest so it only makes sense to use this loan to pay off your other debts if they charge you more than 6%.
Debt settlement is an agreement between a third-party (debt settlement company that you hire) and the creditor/debt collector.
The third-party will try to negotiate a deal with the creditor to allow you to pay less interest or a lower principal. The terms and conditions are different in every agreement, but before you get your hopes up, you need to know about the pros and cons of debt settlement (specifically the cons).
I will be honest, debt settlement is an extreme alternative and should not be taken lightly.
Pros of Debt Settlement:
- Helps you avoid bankruptcy
- Lower your interest and principal payments
- Get creditors/collectors off your back
Cons of Debt Settlement:
- Additional fees= Debt settlement companies will advise you not to make any payments until a negotiation has been achieved. During this time, you will accrue interest, fees, and penalties.
- Time frame= Negotiations differ among every individual, but the average time frame to reach a negotiation is 1-3 years.
- Credit Score= Even if the negotiation is accepted for you to pay a lower amount to settle your debt, it will negatively affect your credit score.
- Expensive Fees= Debt settlement companies charge 15-25% of the outstanding debt.
- Lenders may refuse = lenders may refuse the negotiation and some lenders may not even talk to a debt settlement company.
- Tax Consequences= Any amount forgiven on a debt settlement may be counted as income at year end.
Long story, short… debt settlement is an extreme last resort next to bankruptcy. Try negotiating with your creditor yourself for a lower interest rate instead of going through a debt settlement company.
What would I do? Personally, for me, I would attempt to pay off my debts with either one of the debt-repayment methods listed above. My goal would be to pay off my debts as fast as possible while paying the least amount of interest. This means that I will be using the debt avalanche method when paying off debt.
Unless I owed money to a friend or family. Although I won’t be charged any interest if I delay my payment, the emotional burden of knowing I owe a family/friend money is troublesome, which is why I would prioritize paying them first.
Disclaimer: I am not a financial advisor so this is just my opinion!
If you don’t mind having multiple accounts still being owed and all you care about is minimizing the amount of interest you pay then go with the debt avalanche; just make sure you don’t lose hope and continue to commit to this plan.
On the other hand, if having multiple accounts really stresses you out then target the smallest debts first with the debt snowball method.