Getting rid of debt can be challenging, but in most cases, it is achievable. Learn more about how to get out of debt.
Identify Your Motivations
Before setting a goal to eliminate debt, think about the reasons that drive you to want to get rid of it. What are your motivations? What do you hope to achieve by becoming debt-free? It’s natural to not want to owe anyone, but why don’t you want to owe anyone?
Once you identify your reasons for paying off debt, write them down. “I want to be debt-free because…” or “I want to be debt-free so I can…” Place your list of reasons somewhere you can see it all the time. This will help keep you motivated even when you feel like giving up. It puts your ultimate goal in front of you.
Review Available Options for Getting Out of Debt
When it comes to getting out of debt, the easiest answer (seemingly) is to pay it off. However, you may also want to consider some other options, including:
- Signing up with a consumer credit counseling agency: A nonprofit credit counseling agency can help you budget and create a repayment plan with your creditors. Counselors provide financial education and ensure your plan is realistic for your situation. Make sure to check the reputation of any credit counseling agency you consider.
- Getting a debt consolidation loan: With this type of loan, you can pay off high-interest debts using a loan that has a lower interest rate. These loans can be personal loans, home equity loans, or lines of credit. You may find it easier to pay off the debts thanks to a lower interest rate, but if you use a product tied to home equity, you could lose your home if you stop making payments.
- Filing for bankruptcy: This is the last resort, but it can wipe out your debts or allow you to pay back less over a period of three to five years, after which your debts are discharged. However, filing for bankruptcy is costly and affects your credit for ten years.
You can also choose to pay off your debt on your own. Determine how much you can afford to put toward monthly debt payments. This may require you to cut back on some aspects of your life. You might have to work extra hours or find a way to make money on the side. Any of these options could work; the best way to get out of debt is the one that makes sense to you.
Set Realistic Goals
The time it takes for you to become debt-free is directly related to the amount of money you can allocate toward paying off your debt. The more you can pay, the quicker you can eliminate your debt.
It’s crucial to be realistic because an unrealistic and difficult timeline can destroy your debt elimination plan, leaving you feeling discouraged and unwilling to try again. For example, it may be unrealistic to expect to pay off $15,000 of credit card debt in one year with an annual salary of $50,000 and a mortgage payment of $1,100. If you could afford to pay $2,700 on your credit card each month, you might achieve that, but it’s unlikely you could stick to such a strict repayment plan.
A more realistic goal would be to pay off $15,000 of credit card debt in three years by cutting back and paying $500 a month. This is certainly more attainable.
There are many online debt repayment calculators that will tell you how long it will take to pay off your debts based on the amount you can afford. Some even allow you to input multiple debts. You can also use them in reverse to see how much monthly payment will be needed to get out of debt within a certain time frame.
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Also, use an approach like the debt snowball. This way, you pay off debts starting with the lowest balance debt. You pay an extra amount on the lowest balance debt and pay the minimum on other debts. Once the first debt is paid off, you apply the amount you were paying on that debt to the next debt.
Note: The debt snowball is similar to the avalanche method, but debts are paid off based on interest rates. You pay off the debt with the highest interest rate first, then apply that payment to the next highest interest rate debt.
Commitment to the Plan
Once you clarify your goals and determine how to pay off debts, it’s time to commit. Track your progress using a spreadsheet or graph, or use debt reduction software to create a comprehensive plan. Seeing how far you’ve come can help you stay motivated to move forward.
You may face other priorities. Compare these priorities to your desire to be debt-free. Some, like a vacation, may be less important than getting out of debt, or you may take a staycation instead of traveling. Other priorities, such as an unexpected medical bill, must be paid. You might need to temporarily reduce debt payments and then get back on track as soon as possible.
Don’t Expect to Be Debt-Free Overnight
Paying off debt is not as simple as accumulating it. There is no quick way to eliminate debt, and it can take many years to pay off debt completely. Any extra amount you put toward debt helps. If you fall off track, regroup and start fresh the next month. Over time, you can be debt-free.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Trade Commission. “Getting Out of Debt.”
Source: https://www.thebalancemoney.com/steps-to-setting-a-realistic-debt-goal-960817
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