How to Get Out of Debt – Our Simple Step by Step Guide

Debt isn’t fun. Every payday, a large chunk of your paycheck belongs to your debtors. Plus, there’s interest; paying interest is basically throwing away money because it gets you nothing.

Being in debt over the long term is even worse, as you’ll constantly be stressed out about making all your payments in full and on time each month. That financial stress can really make your life worse.

And so, clawing your way out of debt will bring a ton of financial, mental, and emotional relief.

The process of getting out of debt sounds simple: make more money than you spend and put as much of that extra cash towards debt as you can afford.

But just because it’s simple, doesn’t mean it’s easy. It takes a lot of hard work and grit to dig yourself out of deep debt. Sacrifices will have to be made.

On top of that, getting out of debt is a long, multi-step process that can be overwhelming if you don’t know where to start. Such a large tasks can seem insurmountable, discouraging you from ever getting started in the first place.

7 Steps to Get Out of Debt

Getting out of debt is much easier when you have a structured plan to follow. To help you on your own journey to financial freedom and debt-free living, we’ve put together a comprehensive, step-by-step guide to creating a debt payoff plan.

Whether you’re making six figures per year or barely scraping by…

Whether your credit is amazing or in the dump…

Whether you’re financially savvy or not…

These steps will guide you along the path of debt payoff.

So without further ado, let’s figure out how to get out of debt by following the steps below.

1.) Figure Out How Much Debt You Currently Owe

You can’t accomplish a goal if you don’t have a hard, quantitative value to strive for. In terms of debt, you need to know the exact amount you owe on all your debts.

Gathering up all your debts will take some time. Set aside a couple hours in the evening or on the weekend to log into your online accounts for each of your debts. Write down the name of each debt (the lender/credit card), the purpose of the debt if the debt is a loan (so you can distinguish between good debt, like a mortgage; and bad debt, like a wasteful personal loan), the amount you owe on each debt, the interest rate, and the minimum payment.

You may have been putting this off partly because you’re afraid of seeing the raw amount of debt you owe. However, it’s important to get it all out in the open because you’ll have one grand number to chip away at.

Anyways, compile all of this information on a piece of paper. Put that piece of paper somewhere you frequent in your home, such as the fridge. Seeing that each day will remind you of your goal and motivate you to stick to your plan.

In fact, hold on to this piece of paper even after you’ve followed these steps and become debt free. Use it as a reminder of the debt you were in and swear to yourself that you’ll never let it happen again.

In addition, consider tracking your progress in a spreadsheet on your computer. Sure, you can track each of your debts on their individual sites, but monitoring your progress in one place is much more convenient and can give you another motivational boost.

One way you can do this is to make a master sheet with your total debt, then make separate sheets for each individual debt, all of which feed into the master sheet. Ultimately, how you do it is up to you.

Alright, now the work begins.

2.) Pick Your Debt Elimination Method: Debt Avalanche vs. Debt Snowball

Every goal requires a plan. Now that you know exactly how much you owe, you’ll need to put together a structured debt payoff plan.

Again, it might be tempting to just tackle your debt without any planning, but you’ll most likely start floundering. You won’t see any progress, think you’re not getting anywhere, and give up.

Focusing on one debt at a time in a structured manner works a lot more effectively. But it goes further than that; “outsourcing” your debt decision to a debt payoff strategy makes it much easier to settle on which debts you tackle first and which order you tackle the rest of them in.

There’s also the progress-tracking aspect. Following a plan breaks your big goal (debt-free) down into smaller goals. Accomplishing these smaller goals keeps you motivated along the way, whether you see that debt number hit 0 in your master debt spreadsheet or on its online portal.

But how do you decide which debt to start with and the order in which to pay off the rest of the debts?

There exist two battle-tested debt payoff strategies: the Debt Avalanche Method and the Debt Snowball Method.

Debt Avalanche Method

The Debt Avalanche method, also called the Debt Stacking method, targets your highest interest debt first, regardless of size. After all, interest is a literal waste of money; you don’t get anything out of it (except for a lack of collections knocking on your door) while you’re lining the pockets of lenders.

Under this method, first identify which debt has the highest interest rate. Don’t take principal amount into account at all.

Set all other debts to their minimum payment. Use auto-pay to do this for any debts that offer it (almost all of them should these days). While those debts are paid at the minimum automatically, focus on paying down the highest interest debt. Once it’s paid off, move on to the debt with the next-highest interest rate, and so on until you’re debt-free.

Why is it called the “avalanche” method? Think about it like this: an avalanche starts out as little bits of snow piling up (your payments). Then, your final payment towards that debt frees up much more money (since you’re targeting the highest interest) to put towards other debts, similar to how all that snow buildup cascades down the mountain in an avalanche.

Debt Snowball Method

Targeting the highest interest debt is the most mathematically efficient way to pay off your debt. However, it’s not as effective for most people, especially if that high-interest debt is also on the larger side.

Some people need a few easy, early wins to show them that paying off their debts is within the realm of reality; this is where the Debt Snowball method comes in.

Under the Debt Snowball method, you pay off debts in ascending order based on the amount of principal. Identify which debt of yours has the smallest principal; set all other debts to auto-pay the minimum payment each month and focus on your smallest debt.

It shouldn’t take long to pay the first one off, yet you’ll get a nice motivational boost to aggressively pursue the next smallest debt (in terms of principal), and so on until you have no more debt.

Why is it called the Debt Snowball method?

Picture a small snowball at the top of a hill. To get the snowball moving at all, it needs a small push. At first, it will move slowly and gather only a little bit of snow. However, it gains momentum as it moves down the hill as it gains more and more snow.

The snow represents your money. You won’t have much at first, but you have to put that small portion towards your debt. Paying off that first debt is the initial push; you’ll have more money and momentum to tackle each subsequently larger debt.

Which Debt Will You Tackle First?

Picking from one of the above two strategies comes down to personal preference. Do you hate interest above all else, and want to minimize the money you lose to it? Or do you need to get an early burst of momentum by tackling smaller debts?

Both of them will work. But whichever method you choose, be prepared to stick to it because debt payoff is a long-term task. Don’t jump between strategies or you’ll end up floundering like we mentioned earlier.

Side note: in most cases, you can exclude mortgages from this until every other debt is paid off. Your mortgage is a “good” debt, meaning it brings you something of value (a house, which is an appreciable asset). When all your other debts are done, you can accelerate mortgage payments if you want, but you might earn a better overall return by investing all your newfound debt-free funds.

3.) Make Some Big Changes

Starting and accelerating your debt is going to take several life changes, big and small. Small changes might be easier to make, but making the big changes first gives you yet another momentum boost towards achieving a debt-free life.

Think hard about each of the following. Do you really need to be spending as much as you are on each of them? Do you need to be spending money on them at all?

Most likely not, at least for the former. Consider making these changes to accelerate your journey to financial freedom.

Downgrade or Sell Your Car

When you’re in debt, you should prioritize transportation that gets you from point A to point B safely for as little money as possible. Luxury features and sporty driving take a backseat to price.

If your car payment takes up a large chunk of your paycheck, consider selling it and grabbing a used car. Get an older version of your current car if possible and desired.

This is one of the quickest ways to reduce your debt because you can eliminate most or all of that old debt with your car sale proceeds. Plus, you could cut down your insurance costs; older cars could be cheaper to insure since they’re worth less.

One of the easiest places to find a used car is a car dealership. However, there might be less room for negotiation, so you may want to visit an independent car dealership or even a private seller. Pull all the necessary reports and get the car checked before you buy to make sure the thing doesn’t break down after 5 miles.

No car payment? Have more than one car? Determine how much you actually need that second car. There could be a few thousand of debt payoff funds sitting in your driveway. You’ll cut down on fuel, maintenance, and insurance costs too.

Only own one car and you’ve fully paid it off? Perhaps you can get by with public transportation. This won’t work for most families, but if you’re single or have a spouse but no children and live in an area with good public transportation, going car-less will put you much closer to your debt pay-off goal. Extra money in your pocket from the car sale, no more insurance payment, no more gas, no more maintenance.

Ditch the Credit Cards

Ditch your credit cards if they’re the cause of your debt. It doesn’t matter if they earn you cashback or miles, because those rewards don’t come close to offsetting your debt.

Plus, even if you’re able to pay it off each month, it’s harder to track your progress if you keep adding to your credit card balance. You could accidentally incur more late fees or interest charges.

Lock away your credit cards. Strive to use cash in all situations; watching the bills physically leave your possession isn’t fun and makes you think harder about your purchases.

It’s fine to use debit cards as well, as you’re limited to the money in your checking. However, only use them when cash won’t work, as it’s still easy to get trigger happy with the plastic card and drain your bank account.

Stop Investing (But Only Temporarily)

Saving and investing is fundamental to wealth building, but debt takes precedence. Taking a temporary break from investing to pay off debt frees up much more money that you can use to “catch up” on your investing.

Here’s another way to look at it: your debt principal is a “negative” investment. Interest is a “negative” return on investment. By eliminating your debt, you’re now “earning” more money on your money (less negative = more positive). If your interest rate is higher than your investment rate of return, then eliminating the debt is quite literally a better investment.

Of course, don’t completely stop your 401(k) contributions if you receive employer matching. Contribute enough to get the max matching amount and nothing more. Not only is the matching amount pretax, but it’s free money that’ll be worth much more than some interest savings.

Note: the one exception to this is an emergency fund. Without one, an emergency could land you in a much worse place than where you started. Don’t try to build a 6-month fund, though, as that takes too much time and money; set aside 1 month of expenses.

Cut Subscription Services

Subscriptions services drain your bank account in a predictable fashion every month. You can easily forego these temporarily to squeeze more money out of your lifestyle for debt payoff. Cut the cable, scale back your internet and phone plans, etc.

If you must watch TV, grab a subscription TV service instead of cable. You have endless options, all less expensive than cable. Some might even come with other services for free, such as free Hulu with Spotify Premium.

Sell Unused Items Around the House

Kill two birds with one stone: declutter your house and sell all that old junk for cash. Check out Gazelle (for electronics, electronics are a huge source of “junk-for-money”), Decluttr, Craigslist, Facebook Marketplace, or even have your own garage sale.

By doing this, you’ll also see how much money you spend on stuff you don’t need or use. It also helps build better spending habits in the future.

4.) Create Your Monthly Budget

Now it’s time to figure out how much you can afford to put towards debt each month without going broke. To do this, you’ll need to know your income and what kind of expenses you have each month.

Let’s make a budget.

Note: your initial budget will change a few times as you adjust to becoming more financially aware. Don’t fret if your budgetary numbers fluctuate the first few months.

1.) Calculate Your Monthly Income

Find out exactly how much you make each month. If employed, look at all pay stubs for a month, and feel free to use your after-tax income since it should be consistent from month-to-month.

Self-employed? To make this easier, use pretax income since your tax situation is more complex. Your taxes will factor in next.

2.) Identify Your Necessary Expenses

Some expenses must be paid no matter what. Your necessary expenses are your rent/mortgage, utilities, insurance, groceries, childcare, and similar expenses.

Taxes can be included in here for the self-employed. When you know your estimated quarterly tax amount, set aside ⅓ of that amount each month and count it as an expense. You don’t have to do this, but it’s much easier to budget this way.

3.) Write Down Your Minimum Monthly Debt Payments for Each Loan

Now for the debt portion of the budget. Write down the minimum monthly payment required for each debt. Add them up as well to see how much per month must be allocated towards debt.

4.) Create a Category for Each Regular Expense (And Allocate to Each a Reasonable Spending Amount)

Time for the “budgeting” part. Create categories for each of your regular expenses, such as gas, car repairs, haircuts, internet, cell phone, home repairs, cleaning supplies, etc. Get as specific as you need to; the more specific you can get on your budget categories, the easier it is to track them and identify ways to cut expenses further.

5.) Put All Leftover Money Towards Debt and “Fun” Expenses (But Mostly Debt)

How much money is left over after all that? Whatever amount it is, put most of it towards debt. Keep some for “fun” or “quality of life” expenses. It’s okay to go out to eat once in awhile or be a member of a gym while paying off debt, as it keeps you from hating life. Just try to keep these expenses down.

That being said, re-evaluate your expenses if you have no money left after creating expense categories. Too little post-expense money could have you stuck in one place.

Tip: Use Trim To Negotiate and Lower Your Bills Even More

Negotiating bills saves money, but you may:

• Be afraid of sounding dumb
• Be afraid of “hurting the company’s feelings”
• Not have time to negotiate

Trim can save you here. It’s a chat-bot that negotiates down your cable and internet bills for you. Not only does it save you time, but it’s lack of human emotions makes it a perfectly cold and calculating negotiator.

Trim can also text you spending updates, as well as scan bank statements for subscription services and cancel them at your request.

5.) Lower Your Interest Rates on Your Debts

Lower interest rates mean less money wasted on interest and a faster path to debt-free living. Here are some ways to drop your interest rates.

Refinance Your Loans

Refinance any loans you have, aside from mortgage. You may have some personal loans, but student loans are probably your biggest money-drainer in terms of loans.

If your loans are from private lenders (like banks), refinance them through a company like Upstart. Upstart considers your education and job history alongside your credit history/score, giving you better approval chances.

SoFi and Prosper are other excellent loan refinancing option.

Negotiate Your Credit Card Interest Rates (Or Refinance Your Cards)

Credit cards are a competitive industry. Simply calling your company and asking for a lower rate might work as acquiring new customers is harder than keeping you as a customer.

Here are some more tips for negotiating a better rate:

• Sell yourself on loyalty
• Sell yourself on responsibility (if possible) – You always pay on time
• Research the competition – Let them know of the amazing offers from the competition you’re considering

If this doesn’t work, consider refinancing your credit cards. It works just like loans: take out one large loan with a lower interest rate than your cards and pay off the cards, then you have one debt with a lower interest rate that’s easier to track.

Consider a Balance Transfer Credit Card

Balance transfer cards let you move other debt to them for a lower rate – most of them offer 0% APR for months or even over a year.

Make sure you can pay your debt down in the low-APR period, and read the terms carefully to avoid or minimize other fees.

6.) Slash Your Expenses and Improve Your Spending Habits

Frugality will help you squeeze a few more bucks out of your budget, as well as teach you important personal finance lessons.

Stop Going Out to Eat

We did say you can leave money in the budget for a night out a month, but we heavily recommend cutting it until you’re debt-free. You’re paying much more for the same food, plus tip, plus gas to get there.

Save Money on Groceries

Avoid impulse buys. To do this, make a list before each grocery trip and never shop on an empty stomach. Doing this will help you stick to only what you need, and not buy those cookies because you’re hungry.

In addition, use a shopping rewards app like Ibotta or Shopkick. Ibotta rewards you with cash for your grocery purchases when you submit receipts; Shopkick rewards users for purchasing certain items, scanning barcodes, and even just visiting some stores.

Give Up on Expensive Hobbies (Only Temporarily)

This might be the hardest, but you have to do it for the time being. Seek out free alternatives to more expensive hobby-related activities, such as learning from YouTube videos or reading books about the hobby.

7.) Increase Your Income

Cutting spending and negotiating debt has a floor. Once you hit that floor, you can’t go any lower.

So with those things optimized, it’s time to look to the one thing that you doesn’t have a floor nor a ceiling… the one thing we haven’t covered yet…

Your income. Time to make some more money!

Ask for a Raise

Asking for a raise never hurts, as long as

• You haven’t recently received a raise
• You’ve been working hard and providing your employer lots of value

You can’t JUST ask, though; show initiative. Take on more responsibility, sharpen your skills/abilities, ask for feedback, stay a bit late every so often, etc.

Get it into you boss’s head how hard of a worker you are, and they’ll be ready to give you a raise before you even sit down to negotiate.

Windfalls

Any and all irregular earnings should go straight towards your debt. Whether that’s birthday money, a holiday gift, a work bonus, your tax refund, or a $20 you found on the sidewalk, that windfall will put another small dent in your debt.

Start a Side Hustle

No matter how busy you think you are, you’ve got an extra few hours during the week that could be put to use. Just think about how much time you spend browsing your phone or watching TV.

Take that time and start a side hustle. Many side hustles can be done without anything or with items you already own. Here are a few ideas:

• Drive for Uber/Lyft
• Deliver food with DoorDash
• Dog sit on Rover
• Rent out a room (or your home) on Airbnb
• Rent out your car on Turo
• Collect and return aluminum cans

Start an Online Business Requiring Little to No Overhead

If you’d like, you can go a step further from the side hustle and start an online business. The internet has made starting a business with little to no investment easier than ever.

Chances are, you have a skill that someone wants. Freelance in said skill. Even if you don’t, doing some freelance writing or proofreading work requires almost nothing; you could get a client as soon as today.

Get clients by reaching out to local businesses, browsing job boards, and making profiles on freelance marketplaces like Upwork. Use social media as well to let friends and family know about your new business. You could also set up shop as a virtual assistant and offer your services to anyone you know.

Who knows: what you started as a way to scrape together extra debt-payoff funds could morph into a six-figure business that you can work on from home!

Freedom From Debt is Possible… and Wonderful

Before reading this guide, you may have thought that your ever-growing mountain of debt would never go away.

And honestly, you might still doubt your ability to pay it off.

But we assure you that it’s possible, even if you’re barely getting by or your credit is in the toilet. Every day, people just like you are following these steps and breaking free of the chains of debt.

The keys here are consistency and focus. When you have a plan in place, you just have to follow it day-in and day-out for a long period of time. Focus on the end goal, adopt a frugal mindset, stick to your budget, always look for ways to cut your expenses, and seek out ways to boost your income as well.

Along the way, celebrate each small victory to keep that momentum going.

Before you know it, you’ll log in to that last debt account and the screen will present you with a big, fat $0.00, then subsequently feel a massive burden lift off your shoulders. Feel free to celebrate! Just don’t put yourself back in debt.