Getting into debt is easy. Credit card companies like to give you high credit lines, and lenders are quick to give you a car loan. Unfortunately, before you realize it, you find yourself buried in debt and getting out is not so easy.
If you find yourself spending all your income paying interest on credit cards and making loan payments, it's time to start getting yourself out of debt. Here's how to get out of debt fast.
Create a Budget
The first step is to find out where your money is going and create a budget. Write down how much you spend on mortgage payments or rent, food, clothing, utilities, entertainment and loan payments. You can check your credit report to find out the total amount of debt you have on credit cards, mortgages, student loans and auto loans and how much you are making in monthly payments. This is the figure you want to put into your budget.
The goal is to reduce the amount of money you pay on debt and start putting money aside into a savings account and set up an emergency fund. A good goal is to start by budgeting one percent of your income for savings and increase the amount by another percentage point each year.
Read more: Elements of a Financial Budget
Create a Repayment Plan
After you have created your budget, look at each expense and see where you can either eliminate or cut back. For example, look at any monthly subscriptions that you no longer use and cancel them. Cut back on entertainment expenses. You may find that you can eliminate that expensive cup of coffee from Starbucks each day and free up $20 to $30 per month.
After you've gone through your budget and found expenses you can cut, you can come up with a debt repayment amount that can be used to reduce your debts. It might only be $100 per month, but you'll be surprised how big of an impact this will have on your debts, and you'll be encouraged to find more ways to cut expenses and apply them to your loan balances.
Pay More Than the Minimum
If you're only making the minimum monthly payments on your credit cards every month, it will take you years to pay off that debt. Most of your money is going to pay interest, with very little leftover to be applied to the balance.
You have to start making more than the minimum payments each month if you ever want to get these credit cards paid off.
t's easy to get into debt, especially credit card debt, but with some careful budgeting and following a few debt reduction strategies, you can become debt-free.
Use the Debt Snowball Method
With the snowball approach, you start paying off the loan or credit card with the smallest balance. Let's say you have credit card debts of $7,000, $4,000 and $2,000. Even if the credit card with the $2,000 balance has the lowest interest rate, you will get a tremendous psychological boost by paying off this card first.
Paying one card completely off will give you the satisfaction that you’re making progress and you will be encouraged to tackle the next largest debt. Now you can use the money you were taking to pay off the smallest debt and “snowball” it up to paying the next lowest credit card balance.
The amount you're dedicating each month to pay toward credit cards snowballs up each time you pay one off. By the time you reach the highest balance card, you’ll be paying much more than the minimum amount due each month.
Read more: 5 Useful Apps for Paying Off Student Loans
Follow the Debt Avalanche Approach
With the debt avalanche method, you start by paying off the debt with the highest interest rate first. This makes economic sense because you want more of your payments going toward reducing the principal balance rather than just paying interest. The avalanche method is the opposite approach to the snowball method.
After you've paid off the card with the highest interest rate, you move on to paying the next highest rate. You take the money that you were originally paying on the highest rate card and apply it to the next balance. This is the gist of the avalanche method.
It doesn't matter whether you use the snowball approach or the avalanche method. It depends on which method you prefer that gives you the most satisfaction that you're making progress.
Consolidate Your Debts
Another way to quickly reduce your debts is to apply for a personal loan to pay off all your other debts and make only one monthly payment.
Personal loans will typically have a lower interest rate than the interest rate you're paying on credit cards and maybe even your car loan. In many cases, personal loans do not charge annual fees or origination fees. If you take the same amount of money that you were paying toward credit cards and other loans, you'll be able to reduce your total debt faster because more of your money will be going to reduce the principal rather than paying interest.
In many cases, consolidating all your debts into one single personal loan payment is much easier to manage than making several payments per month. However, be careful not to start charging again on your credit cards after you pay them off with the personal loan.
You can apply to online lenders to get an indication of the amount you can borrow and the interest rate on a debt consolidation loan.
Transfer Your Balances
If you have a good credit score, you're probably receiving offers in the mail to transfer your balances to another credit card. These cards offer a zero percent interest rate for up to 21 months. However, they do charge a balance transfer fee, which usually ranges from 3 percent to 5 percent. But the zero percent interest rate more than makes up for the savings you will gain by not paying the high interest rates on your other credit cards.
Unfortunately, the zero percent introductory offer doesn't last forever on a balance transfer credit card. After the grace period expires, these cards will go back to charging a higher variable interest rate similar to other credit cards. The goal is to have your entire balance paid off before the interest rate increases to the usual high credit card rates.
Stop Using Your Credit Cards
After you start your debt reduction plan, stop using your credit cards. Don't put any more purchases of everyday expenses on your cards unless you are absolutely sure you can pay off the balance by the end of the month.
Increase Your Income
If possible, try to find a side job where you can earn extra income. Then take all of the extra money you earn from the side hustle and apply it to your debts.
If you follow these steps and stick to your budget, you will soon be debt-free.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.