6 Ways to Become Debt-Free
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If you’re in debt — no matter how much — it’s likely causing you anxiety. Whether you owe $1,000 or $10,000, your debt is always lurking in the back of your mind. After all, it isn’t going away — one day, you’ll need to finally pay it off.
If you’ve wanted to become debt-free for a while but didn’t know where to begin, you’re in luck. Below, we’ve explored six ways you can finally pay off your balances and become debt-free.
Table of Contents
- Create a strict budget.
- Keep an emergency savings fund.
- Consider paying off new debts first.
- Consolidate your debt.
- Use debt snowball method.
- Use debt avalanche method.
1. Create a strict budget
If you have a significant amount of debt to pay off, you’ll likely need to cut your expenses in some way. Try creating a new budget that will allow you to put more toward your debts each month.
“You can pay your debt off much faster by cutting your expenses to the bare minimum,” said Lance Cothern, founder of the Money Manifesto, a personal finance blog.
One common method for cutting back is the zero-based budget. With this method, every single dollar is accounted for. For example, if you bring in $6,000 each month, your zero-based budget should assign a purpose for every single one of those dollars.
Take a look at your salary, and then figure out exactly how much money needs to go toward monthly expenses. The total amount you account for should not exceed your take-home salary. If you have money left over after allocating for the necessities, put it toward paying off your debt or building up your emergency savings fund.
2. Establish an emergency savings fund
Getting out of debt is crucial, but equally as important is putting good money habits into place so you avoid acquiring new debt. One way to consistently stay out of debt is by creating an emergency savings fund. “Emergency funds are essential to help you avoid going into debt [if] unexpected expenses or a true financial emergency pops up,” Cothern said.
Once your high-interest debt is paid off, Cothern said you should focus on having three to six months’ worth of expenses in your emergency fund.
3. Consider paying off new debts first
If you’re in significant debt, that means you might have some accounts that are already in collections. These debts have likely already damaged your credit score, while newer debts might not have yet.
4. Consolidate your existing debt
Consolidating your debt involves taking all of your outstanding balances, combining them, and then making one monthly payment. By consolidating your debt, you may be able to lower your interest rate and shorten your repayment period, all while potentially increasing your credit score in the process.
“Consolidating debt can be a helpful way to pay a lower interest rate on your debt,” said Cothern. “You can use that lower interest rate to your advantage by paying more toward your debt to pay it off faster.”
There are a couple of different ways you can consolidate your debt. You can take out a personal loan, also referred to as a debt consolidation loan, which will go toward your consolidated debt each month. Personal loans typically have fixed interest rates and can be obtained with a less-than-stellar credit score.
Another way to consolidate your debt is by creating a debt management plan with a nonprofit credit counselor. It’s fairly simple: You come up with a repayment plan, and then make one or two payments to your counselor each month that get distributed to your creditors. Depending on the situation, your counselor might even be able to negotiate down the balances on some of your debts.
5. Try the debt snowball method
You’ve probably heard of the debt snowball method for paying off debt. This method was popularized by Dave Ramsey — radio personality and author of “The Total Money Makeover” — and it’s really quite simple.
With the debt snowball method, you repay your debts from smallest to largest. You still make the minimum monthly payments on all of your balances, but then you also put an extra amount toward a specific debt you’re trying to pay off each month.
“The debt snowball method of paying off debt can help a person quickly see progress when paying off their debt,” Cothern said. “If you’re motivated by quick ‘wins’ and immediate results, the debt snowball [method] can help you feel accomplished on your debt payoff journey.”
6. Or use the debt avalanche method
The debt avalanche method functions similarly to the debt snowball method, but with one main difference. Instead of paying off debts from smallest to largest, you pay off debts with the highest interest rate first.
Although many people see success with the debt snowball method, the debt avalanche method usually leads to more money saved in the long run, as you’re paying off your highest interest rate debts first.
“The debt avalanche method of paying off debt is usually better for those with an analytical mind,” Cothern said. “The debt avalanche is the fastest way to pay your debt off, but it may not offer quick wins if your highest interest rate debt isn’t your smallest balance owed.”
5 things to skip when repaying debt
If you’re committed to becoming debt-free as quickly as possible, there are small ways you can cut back that will pay off in the long run.
- Coffee runs: Does that $5 latte in the morning really make your day that much better than a cup of coffee brewed at home would? Cutting back on a daily coffee run before work could save you up to $100 per month that could instead go toward paying off your debt.
- Eating out: Why pay $17 for a fancy bowl of pasta when you can make something just as tasty for much less money at home? Limit your dining out to once or twice a month. If you eat out for lunch at work, consider bringing your lunch four days a week and only going out for lunch on Fridays.
- Movies, concerts and shows: Entertainment is all around us. Instead of paying $40 for concert tickets, consider watching a movie on Netflix or having friends over for a fun game of Cards Against Humanity — you’ll thank your wallet later.
- Your cable: Thanks to TV and movie subscription services like Netflix, Hulu and Amazon Prime, having cable isn’t really a necessity anymore. Consider getting rid of your cable plan and opting for one of these services instead.
- Your gym or fitness studio membership: If you spend a significant amount of money each month for a gym or fitness studio membership, considering cutting the cord. Instead of paying $150 per month to spin, get a bike and ride outside instead.
Giving up things while paying off debt can be tough. Cothern advises still saving a very small amount each month for the things you love most.
“Take a look at your expenses and set aside a small amount of money to keep the things you value most in your life,” he said. “You may not get to do them as much as you will when you’re debt-free, but you can still enjoy the occasional treat while paying off debt.”
You can set aside $100 per month for “fun” things, for example, like pedicures, movies or a nice meal out. But just remember, Cothern said, that when that $100 runs out, you’re done splurging for the month.
Becoming debt-free is possible if you have the determination and good financial habits in place. Whichever above strategy you choose for paying off your debt doesn’t matter so long as you’re dedicated and stick to it for the long run. Just remember how good it will feel when you see your debts slowly creeping toward $0.