- 10 min read
- Choose from top tips to create your own get out of debt plan.
- Cut spending, save more, and aggressively pay off your debt to get out of debt quickly.
- Create your own plan or use professional help. Most importantly, stick to your plan.
Discover how you can get out of debt
Sure, you want to pay off your debt. However, what about all of your basic monthly expenses such as housing, groceries, transportation, and medical bills? And don't forget other needs, including a well-earned family vacation, kids' education, house repairs, or new appliances?
Are you resorting to running up credit card debt to make ends meet? Or do you have a lot of loans that are weighing you down?
From our experience, there is no one size fits all solution. However, one thing is sure. The fundamental answer to “how to get out of debt” is to create a personalized plan and stick to it. Choose from the tips and hacks that work best for you. And most importantly, focus on using your money to pay off debts.
Top six tips to get out of debt
1- Take a realistic look at your finances
2- Spend less
3- Save more for emergencies
4- Borrow cheaper
5- Plan ahead
6- Stay motivated - stick to your plan
1- Take a realistic look at your finances.
How much money do you have available to pay off your debt? If you don’t know your financial situation, it will be hard to get out of debt. The critical building blocks are your budget (spending habits), assets (home and savings), insurance (health, auto, and home), and debts (credit cards, personal loans, auto loans, mortgages).
Here are three hacks to take a realistic look at your finances:
- Organize your financial paperwork: Keep separate files for your different credit accounts, income statements, insurance policies, bank accounts, bills, and expenses.
- Prepare your budget: There are several ways to keep a budget, from the simple envelope method to sophisticated software that automatically tracks your bank and credit card accounts. Choose the one that best fits your style.
- Estimate your monthly payment capability: Make a list of your debts and include your balances, interest rates, and monthly payments. Using your budget, figure out how much you can afford to pay each month towards your debt. Can you easily make your monthly payments, or are you struggling to make monthly payments? The more you put toward your debt, the faster you pay it off.
2- Spend less money
Spending less is a win-win strategy to get out of debt. You run up lower credit card bills and accumulate less credit card debt. It also means that you will have more cash at the end of the month, which you can use to pay off your debts.
There are many ideas for spending less money beyond the popular one of stopping to buy expensive coffee. We have gathered some of the top ones and recommend that you choose ones that fit your lifestyle.
Here are five hacks to spend less:
- Cut grocery expenses: Groceries are a main steady cost for every household. A family of four most likely spends more than $1000 per month on food. Add on household items and impulse purchases, and the amount is going to rise. Create a shopping list in advance and avoid impulse shopping. Plan healthy low-budget meals and avoid eating out frequently.
- Cut transportation costs: Transportation costs are one of the most significant items in a household budget. Driving an economy car with great mileage can save money each month. Also, a less expensive vehicle with small (or no) loan payments means more money in your pocket, which you can use to get out of debt.
- Find cheaper insurance: Another big-budget item is insurance, especially health insurance. Health insurance premiums can be expensive. However, not having coverage can mean running up substantial medical bills. Finding the right health plan is complicated, and trading off between monthly payments and deductibles is not easy. Shop around for the appropriate coverage and competitive rates.
- Resist the urge to buy: We are all tempted by online shopping and the desire to purchase gifts, new gadgets, go to restaurants or splurge on a vacation. In today’s consumer-driven world, it is easy to spend money. However, before making a purchase, ask yourself: Is the money better spent paying off debt? By taking a step back and evaluating if you need to make a purchase, you can save money and get out of debt faster.
- Set up automatic bill paying: Make bill paying easy through an automated service, including the one your bank offers. Start with your credit card payment. Even if you only can make minimum payments, send your payment on time. Late payments risk higher interest rates (penalty rates can be more than 30%), which means still higher minimums. Plus, late payments mean late fees, adding even more to the mountain of debt.
3- Save more for emergencies
Why is a healthy emergency savings fund necessary? No matter how hard you budget for your everyday expenses, there are always unexpected costs. A car breaks down, your roof needs repair, or maybe you need expensive medical or dental care. An emergency fund helps you free up your money to pay bills and reduce your debt load.
Did you know that more than 50% of households don’t have sufficient emergency funds? One common way of funding emergency bills is to take out a high-interest rate loan or run up credit card debt. If you don’t have a rainy day fund, you end up with more debt, paying lots of interest, and taking more time to get out of debt.
Here are three hacks to save more:
- Stop charging: Are credit cards serving as "emergency funds? Be sure you don't add to your debt load by increasing your credit card debt.
- Use a savings app: Choose a savings app that lets you automatically put aside money each month. One example is Digit, which uses a proprietary formula to calculate what you can afford to put into savings. Digit takes what it determines you can afford from your checking account and deposits it into your Digit account.
- Use your bank: Most banks have savings plans that allow you to set up an automatic payment plan easily. Before you spend the money, tuck a regular amount into your savings account. Once you have at least 3-6 months of spending saved up, start paying off debt and moving money into your investment account.
»Learn more about emergency savings.
4- Borrow cheaper
One of the key ways to pay off your debt cheaper is to borrow money at a lower rate. Lower borrowing rates allow you to pay off money faster and keep your monthly payment affordable.
The significant factors that determine your interest rate are your credit score and market rates. An excellent credit score allows you to get better rates for your credit cards, personal loans, mortgage loans, and auto loans. You can borrow cheaper by shopping around and finding the best terms at any given time.
Also, if your credit score improved, consider refinancing your current debt into better terms. The lower rate can allow you to pay off your debt more aggressively.
Here are four hacks to borrow money and pay of your debt faster:
- Refinance your mortgage: Keep an eye on mortgage rates: You can save tens of thousands of dollars on your mortgage by refinancing into a lower rate and a shorter period. Housing is one of the highest household costs, and mortgage loans are probably the most significant loan. Mortgage rates fluctuate considerably, so it is a good idea to keep track of mortgage rates. Did you know that 30-year mortgage rates were about 5% at the beginning of 2011? They dropped to about 2.81% in late 2020, and 15-year rates were under 2.4%.
- Consider a balance transfer: Balance transfers are an excellent solution to pay off debt cheaper and faster. However, they are useful if you have excellent credit, debt up to $15,000, and can afford to pay off your balances aggressively. To make this work, you need to be disciplined and not run up new credit card balances.
- Consolidate your debt with a personal loan: Make your life simpler and consolidate your debt into a manageable, lower-interest loan. While a personal loan is shifting your current debt, it can help you qualify for a cheaper interest rate. Take advantage of an improved credit score and shop around for the best debt consolidation loan.
- Use the Snowball payoff plan: The snowball payoff plan is one way to avoid borrowing. Using your money is the cheapest way to get out of debt. Don’t get caught in the trap of making only minimum payments. Adding even $10 or $20 to your monthly payment — or rounding up to the next $10 or $100 increment — will knock out debt faster without adding much to your fiscal pain. Start by paying off your smallest balances and then work your way through to your largest ones. By staying disciplined, you can save thousands of dollars and pay off your debt more quickly.
» Learn more about debt consolidation loans.
5- Plan ahead - make achievable goals
Good preparation allows you to spend your money wisely, borrow money cheaper, and pay off your debt faster. Using hacks are also fantastic ways to get out of debt. However, the key to success is to plan and make manageable goals.
Let’s say that you are deep in debt, and you decide to set a goal: “I want to pay off my debt in five years?” While that is a great goal, is it achievable? Do you know what the best actions to take are? Should you start lowering your spending, make more money, cut coupons? How long will it take to pay off your debt? A good plan needs specific action items.
If you have trouble setting up a plan, then seek out professional help.
Here are three hacks to help you create a plan and pay off your debt. Choose the one(s) that best fit your situation.
- Create a DIY list of achievable goals. These goals should be specific, measurable, and attainable. Here are a few examples: I will pay $500 per month to pay off my debt. I will cut my grocery bills by $200 by the end of 3 months. I will find cheaper auto insurance and save $400 a year.
- Talk to a Consumer Credit Counselor. Maybe you don’t have a firm handle on your budget or finances. A counselor in a consumer credit counseling service will help you analyze your spending and debts and find an attainable monthly payment.
- Talk to a debt relief specialist. If you are struggling with your payment, then speak to a Bills.com debt consultant. They will review your situation to create a debt payoff plan that optimizes your monthly payment, time to get out of debt, and overall costs.
6- Stay motivated- stick to your plan
Is there the best way to get out of debt? The simple answer is no. Each person needs to find the right solution and the right tactics that work for them.
If we had to say the essential ingredient in answering how to get out of debt, it would be sticking to your plan. No matter what tip or hack you choose, persevere.
Finding the right motivation is key to a get out of debt plan. Here are three hacks to stay motivated and get out of debt:
- Monitor your success. Use an online tool, make a list, or use a fancy app to track your progress. When you have bite-size goals, it is easier to track and also more rewarding. When you hit a goal, don’t forget to reward yourself.
- Hide your cards and don’t run up new debt: Running up new debt is one of the best ways to spoil a get out of debt plan. Once you are on the road to getting out of debt, avoid the temptation to use your credit cards. Some experts will tell you to cut them up, and others say hide them.
- Keep working on new ideas: Don’t be content with old ideas. Keep finding new ways to spend less, save more, and more aggressively pay off your debt.
Struggling with debt?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in North Dakota, 18% have student loan debt. Of those holding student loan debt, 5% are in default. Auto/retail loan delinquency rate is 3%.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.