A Surefire Plan to Get Out of Debt —Even on a Low Budget

Ready to get out of debt? The road ahead takes some discipline, hard work, and patience, but these steps can help you finally get control over your finances.

plan to avoid debt with dental plan

Photo by Pictures of Money via Flickr

Debt is an all-too-common issue plaguing almost all Americans. Needless to say, the burden of carrying school debt, car loans, and a mortgage goes beyond monetary value. Heavy debt can leave people emotionally fragile and physically affected by the stress it causes.

Still, it sometimes seems like debt is just a normal part of life. You graduate high school, go to college, get a job, start a family, buy a house, and quickly accumulate $46,150 in debt (which is the average debt for American individuals.)

Most young, Americans ages 18-24 feel pretty optimistic about getting out of debt, believing they will probably be debt-free before their mid-thirties. But well over half of families in American households headed by someone over age 55 still have debt, with mortgages as the main culprit.

But here’s the thing: You can be optimistic about getting out of debt. The questions you must ask yourself are these: Do you, like many others, want to just carry the “normal” burden of debt the rest of your life? Or are you willing to take the steps towards a debt-free life, even if that means living a less comfortable lifestyle?

If you answered “yes” to the second question, it’s time for us to get started.

Breakdown of America’s Debt Problem

Before you begin overcoming debt, you should know what you’re working with. Nerdwallet listed out what the typical household is carrying along with total U.S. consumer debt:

 

Total owed by U.S. household carrying this type of debt

Owed by U.S. consumers

Credit cards

$15,762

$733 billion

Mortgages

$168,614

$8.25 trillion

Auto Loans

$27,141

$1.06 trillion

Student Loans

$48,172

$1.23 trillion

Any Type of Debt

$130,922

$12.12 trillion

 

Of course, some of this debt is supposed to be “good.” For example, you can look at your student debt as investing in a degree that will qualify you for a job that pays itself off. And a mortgage can be creating equity in a home as an investment opportunity. Even if these things are considered to be necessities, either one can be taken to extremes that only accumulate more unnecessary debt.  Credit card or car loan debt with high interest rates tends to be unnecessarily costly, which adds even more to the mound.

How to get out of debt

1. Get Seriously Committed

This step might seem obvious, but again, a lot of people think of debt as just another part of life. You have to completely reset your mindset about how you view and spend money. Getting out of debt is not an easy task — it requires a change in lifestyle, maintaining motivation and discipline, and often times countering peer pressure.

Here are some things to do before you start:

  • Face the reality.
    Unless you win the lottery or get a seriously grand inheritance, debt isn’t just going to disappear. Face the facts: getting out of debt is going to be a process, sometimes a difficult one at that. But it’s not impossible, even if you set goals to pay off all your debt in just a few short years. The other reality is that you don’t have to carry the burden of debt into retirement years —you can start getting rid of it now.

  • Get your partner on board.
    Your significant other may share the debt with you or even carry some of their own loans. Because getting out of debt comes with a big lifestyle change and dedication, both of you need to be on board to truly succeed. It’s impossible to take on this challenge if your spouse or partner has bad spending habits or an unhealthy relationship with money.

  • Make a list of motivators.
    What dreams has debt kept you from? Travelling whenever, wherever you want? Buying a house you love? Write out what you want your debt-free life to look like. Set realistic goals and put reminders of them where you can see them on a daily basis. Put up pictures of your dream home or ultimate travel destination that you’ll enjoy once you gain control over your finances. Place them in your wallet, on your walls, or as your screensaver to remind you of the possibilities.

2. Figure out what you owe, and create a budget spreadsheet

List all your debts, interest rates, balances and minimum payments to find out the total of what you owe. To get out of debt, you need to take a long, hard look at that amount. Knowing the total will give you a better idea of how to pay it off and how long it’s expected to take. And if the number scares you because it’s higher than you thought, don’t worry. Little by little and month by month, the debt will get smaller.

You can create a debt snowball by listing the debts from lowest to highest amounts on a spreadsheet. This will help you breakdown how to start paying off debt by tackling the smallest debts first. Make a plan to make the minimum payment on each item except for the first. For that bill, make a goal to pay more than the minimum each month. By doing something as simple as eating out less, you could put the extra money towards paying off that payment until it’s gone. Once you pay off that debt, move on to the next debt and continue the pattern.

Each time you pay off the last payment on a debt, celebrate it! Put the list somewhere you can see it, marking off the debts that don’t have a hold on you anymore. it’ll be a good motivator to keep on your budget and head towards financial control over your life.

3. Set an allowance for yourself.

Obviously, you can’t get rid of debt if you keep on adding to it. What you can do is set an allowance for yourself to make sure that you’re living well within your means. Here are some helpful ways to do that:

  • Budgeting Apps
    One way to make sure that your staying within your allowance is to use apps like Mint or LearnVest. They keep track of your debts, cash, and transactions. It’s wise to add your purchases manually so that you are aware of how much your spending. Some apps let you set monthly or weekly spending goals so that you can keep motivated to spend less and save more, all on your phone.

  • Cash only
    You really have to keep a watchful eye on your spending habits to do this. Depending on where you live, it can be all too easy to make little purchases here and there that quickly add up. Some people set up budgets and limits by only using set cash amounts for each area of spending. Whether it’s for dining out, groceries, or whatever, you can use your weekly cash allowance to keep from overspending. Once it runs out, you can’t replenish it until the next week. So if you run out by Wednesday, that means you’ll just have to eat in the rest of the week. That way, you really have to make wise decisions about where you’ll spend money, by focusing on necessities instead of frivolous or impulsive buys.

  • Track credit card spending
    If you still want to use a credit or debit card for purchases, you’ll really have to keep track of your spending. It’s easy to overspend when you don’t stop to consider you much you spend on a regular basis. With cards, you can keep a log of expenses that note your weekly allowance. You can subtract the amount leftover after each expense. You can also plan ahead with this method if you want the allowance to carry over week to week. If you know you're going out of town to visit family, for example, you can plan on spending more money that week by spending a little less the weeks that precede the trip. It takes practice and discipline, but it gets easier as you  reap the rewards of saving money.

4. Downsize and Liquidate Assets

Being bombarded with debt might also mean that you’re bombarded with loads of stuff. Whether it’s big like homes or cars or small like furniture or clutter, it may to time to minimize your belongings. To start repaying debt, it may require sacrifices the things you love but don’t need —especially things that only add to your debt.

  • Home
    Whether you buy or rent, you can always downsize if necessary. Maybe you were naive about your first home purchase, buying something that was much larger and more expensive than you needed. Although owning a home comes with pride, you may want to consider selling your home if downsizing is a good option for you. If you’re renting and living with debt, you could live in a cheaper place. It might not be in the perfect neighborhood or maybe it won’t have that spare bedroom that you wanted. But temporarily living smaller will allow you to be debt free sooner, and then you can live with more money than ever before.

  • Car
    You may very well be in love with your brand new sports car. But downsizing to a car that costs half as much may also pay off a couple of debts, too. If you have a significant other, you may be able to share a car instead of paying 2 car payments each month. If you’re really determined to get out of debt as soon as possible, you might even consider doing without a car for a while. Depending on where you live, you can easily take advantage of public transit. Or you can commit to walking and biking wherever you need to go. Not only would you save money because you're not making a car payment, you also wouldn’t have to pay for insurance or gas, helping you pay off debt faster.

  • Clutter
    If you want to be debt-free, it’s time to liquidate some the the clutter and other things you don’t need. It could be old movies, video games, clothes, or anything you own in excess that could be turned into money to pay off debt. Consider having a yard sale or selling stuff online to start getting back a little money; and remember, you don’t have to do this all at once. Take it one thing or a set of items at a time until you are left only with the minimal necessities.

Live out your new lifestyle

 

Look for ways to cut costs in everything you do. Sometimes, it can be difficult to say no to fun outings and events, but saving money requires compromise. Tell family and friends about your goals to pay off debt so they can understand why you can’t just go out to lunch all the time or out for drinks on the regular. That way they can be on board with you having potlucks and movie nights at home, where you can have fun (and free) enjoyment.

The best thing you can do is look for free or inexpensive alternatives to your current lifestyle. Here are some ideas for you:

  • Cut out cable
    Instead of keeping a ton of channels available that you don’t even watch, use cheaper online media like Netflix or Hulu to watch your favorite shows.

  • Find Free Workouts
    Drop your gym membership and find ways to exercise for free. Take a run at the park, play a recreational sport, or stream free workout and yoga videos to keep your body and finances in shape.

  • Use the Library
    Not only can you read free books at the library, they also have a plethora of free resources and items like classes, movie rentals, and free wifi if you decide to get rid of your internet, too.

  • Have access to Healthcare
    Taking care of your body will prevent costly medical bills in the future. Even if your don’t have good insurance, there are ways to find the care you need at an affordable price. Depending on your income, you can look into Medicare to see if you qualify. Or if you need vision or dental care, you can consider getting a discount dental card. This membership gets you discounted procedures and service rates to save you some more money.

  • Buy wisely
    Being a little wiser about your spending can save you a ton and help pay off debt faster. Buying in bulk is not always convenient, but it’s much more cost-effective. Buying used goods like electronics and clothing will save you a lot of money, and you’ll still have everything you could need.

  • Cut back your phone plan
    You don’t need the fanciest, most expensive phone plan to survive daily life. Cut back on data usage or get a simpler plan to cut monthly expenses. Using Skype or Google Voice more often will allow you to have the same services like video calls and texting for free.

Find ways to earn more while spending less.

Cutting costs can save a few hundred dollars a month. But finding ways to earn more as you live more frugally can eliminate debt much faster. Imagine being able to put an extra thousand dollars into paying off debt, reaching financial freedom even sooner than you hoped. Here are some ideas for adding to your income:

  • Get a second job
    It doesn’t appeal to everyone, but it could be one of your best options for saving more money. Even if you only work a couple nights or even just one day on the weekend, that extra work will significantly shrink your debt. Plus, income from a separate job can be dedicated entirely to debt payments. If you have trouble sticking to your allowance, this can be helpful to having control over income by putting it directly towards your loans.

  • Negotiate a raise
    Think about negotiating a raise if you’re in a good position at work. Even if you don’t get it, it’s still worth at least trying. Make your case by pointing out how hard you work, and don’t mention that paying of debt is the reason you need it. Even if it’s only a few hundred dollars more per month, you’ll be that much closer to being debt-free.

  • Get a side hustle
    Start a small business on the side to get a little extra income each month. It could be as simple as babysitting or renting out your spare room on Airbnb.com. Either way, you can put the extra money towards paying off debt sooner.

Taking Preventative Measures to Avoid Debt

Whether you finally out of debt or your entering adulthood debt-free, there are some preventative measure to take to keep yourself debt-free:

  • Get an affordable education.
    Learning and educating yourself as much as possible is priceless, but there are ways to get the degree you need without getting into huge student loans. Consider starting out at a junior or community college to get some courses out of the way. They are not only more affordable, many people are eligible for free education, and most credits transfer to 4 year universities. You can also dedicate yourself to earning scholarships to pay for your education. Getting top grades and participation in clubs or sports may land you some huge discounts on your education. Then when you graduate, you’ll be ahead of the game without the burden of debt.

  • Create an emergency fund
    Whether you’re trying to prevent or pay off debt, it’s crucial that you set aside money each month in an emergency fund. The unexpected will happen, and you should be ready for it. That way, you won’t have to put emergency expenses on a credit card with interest on payments. Instead, you can live your life knowing that you are ready for whatever comes your way.

  • Always pay on time
    Avoid interest fees and build good credit by paying all your bills on time. And to make sure you can always pay them on time, don’t spend more than you earn. If you know big expenses are coming up like a vacation or a big move, save up money before hand so poor planning doesn’t land you in debt.

  • Take advantage of compound interest.
    Take advantage of your age by saving while you're young. You can make your money grow by investing it and reaping the rewards of compound interest. That way, you’re the one making money, not the creditors you were indebted to.

Debt doesn’t have to control your life. If you want to make your way towards freedom from debt, it’s important to stay motivated to living a more frugal lifestyle. The process won’t always be easy, and it surely won’t happen overnight. But we can tell you this: it’s worth it and you can absolutely attain financial freedom.

So are you ready to begin your journey to a debt-free life?

 

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