How to get out of debt
Learn more about the strategies to find the right option for you.
If you have debt, you're not alone. Experts say that a middle-class lifestyle is more expensive with health insurance expenses and education costs outpacing wage growth. This has resulted in more households relying on credit cards and other ways to keep up with and cover emergency and daily expenses. Here are a few tips that may help manage credit cards and debt in your household.
List out your debt
It's easier to see what kind of debt you have and what you are paying when you list out your debt. Some people like to list their debt starting from the highest interest rates to the lowest. Others like to list their debt starting from highest balances to the lowest. There's no right way, just do whatever feels right for you.
Create a budget
You'll find that creating a budget and documenting what you spend and what you take in is a good first step. A budgeting worksheet will help you lay out your fixed, variable and miscellaneous expenses. This will help you get an idea of what discretionary income you have left at the end of each month. Be sure to include a line item for every single debt and payment you have.
Even if you don't have much leeway in your budget, try to include a separate line item dedicated toward reducing your debt. Knowing this will help in your debt repayment plan. Here are few things to prepare and examine.
- Bills. Gather your bills (utilities, insurance, etc.) and pay stubs.
- Receipts. Look at receipts to see what you typically spend on things like groceries, entertainment, transportation, clothing and everyday expenses.
- Income and paychecks. Gather and add all of your paychecks and any other income, and subtract your expenses from that.
Create a debt management plan and strategy
Some people choose to have a financial professional help them. There are several strategies to help create your debt repayment plan. Here are a few things to consider.
- Avoid adding new debt. If at all possible, do not use your credit cards or take additional loans.
- Prioritize debts. Pick the loan or credit card with the smallest balance or with the highest interest rate, and focus extra resources on paying off that first. Then move on to the next smallest one or next highest interest rate loan or credit card. A credit card payoff calculator is helpful.
- Consolidate debt if you can. Balance transfers and cost effective debt consolidation can be a good way to both reduce your interest rates and streamline your payment strategies. If you have a good credit score, you may be able to qualify for a zero- or low-percent balance transfer. Be sure to consider interest rates, costs and fees. Using a consolidation loan calculator is helpful as well.
- Pay a set amount or more than the minimum amount due. Try to pay over the minimum or even double the minimum due to pay down the balances and principal faster.
- Automate your payments. Setting up an automatic payment plan from your checking or savings account is a simple and effective method to paying down debt.
- Put extra income or resources to work. Apply bonuses, tax refunds and any other money you make, such as a second job, to work on your credit cards and loans.
- Set up an emergency fund. Prioritize setting up a financial emergency plan and fund it before executing your debt repayment plan. Calculating and funding your emergency fund is critical to help buffer unexpected and costly events when they happen. In addition, it may also give you a sense of security.
- Take small steps. It's easy to get overwhelmed when you have debt of any type. Tackle them in small steps and know that every little contribution matters. Try to make progress each month, even if it's a small amount.
- Watch your statements and monitor your credit report. Keeping a watchful eye on your bank statements, credit card statements and credit report is a way to help you see if your hard work is paying off. Credit monitoring allows you to keep tabs on account activity. You'll also be immediately informed about any fraudulent activity.
Now that you've learned a few tips on how to manage debt, check out "Four kinds of savings" for some really simple tips on getting some cash in the bank for the stuff that always seems to pop up.
Calculators and worksheets
Give these tools a try to help reduce your debt.