An All-Inclusive Guide On How To Get Out Of Debt

Debt can be a stressful experience and may prevent you from getting started altogether. When you’re debt-free, you can pursue your goals without limiting your opportunities. Are you ready to get on the path to financial freedom? Read on and learn more!

Main Types Of Debt

All debts are not the same. Here are the main categories of debts.

Secured Debt

This is a type of debt secured by collateral. It can take many forms and is harder to negotiate. The lender performs a credit check to determine how well you can handle the debt. Your security can be real estate, cars, furniture, inventory, and other investments. 

For example, if you get a mortgage the house serves as collateral in case you default. You have to sign a deed of trust to grant the lender security interest against the property. Keep in mind that you don’t fully own the asset until the debt is fully paid off.

Unsecured Debt

This type of debt is not secured by your property. It can include student loans, medical bills, utility payments, health club membership, lawyer fees, and more. If you fall behind your repayments, the lender cannot claim your assets for the debt. Instead, he can hire a debt collector to coax you to pay the debt. 

Alternatively, the lender can ask the court to put a lien on your assets or garnish your wages until the debt is fully paid. If this doesn’t work, he can send a report to a credit reporting agency. It’s worth mentioning that a negative report can hurt your credit score. This makes it even harder to obtain a future loan.

Mortgage Debts

This debt is secured by real estate property. The borrower is obliged to pay the monthly payments. Most mortgage loans are issued at 15-30 year terms. If you’re struggling to keep up with the monthly payments, you could be building the debt. 

In a residential mortgage, you pledge your home to the bank. And in case of a foreclosure, the bank will evict you from the house and sell it to pay the debts. When you take a fixed-rate mortgage, you pay the interest for the life of the loan. If the interest rates rise, the monthly payments do not change.

Revolving Debt

This is a debt facility between the lender and borrower that does not feature fixed monthly payments. The payments are based on the outstanding balance and interest rate. A good example of revolving debt is a credit card. The consumer is free to spend any amount until the limit is reached.

5 Biggest Mistakes People Make When Trying To Get Out Of Debt

When you over-leverage your debt, you’re putting yourself in long-term financial risk. You must avoid some costly mistakes when paying your debts. Let’s jump right in!

Sticking To The Same Old Habits

Let’s be honest: change is tough. If your debts are accumulating, you don’t have to shop or eat from the same restaurants. You can eliminate some luxuries like taking your morning coffee in high-end café. And instead of buying your lunch at a local restaurant, you can make yours at home. 

In the evening, you don’t have to go to the theater. Just enjoy your favorite show in the comfort of your home. But before you make these changes, you have to analyze your spending habits. While this may be a bitter pill to swallow, it pays a huge dividend. You must be ready to make the necessary changes.

Making The Wrong Priorities

If you want to be debt-free, you should make it part of your financial goals. The biggest problem we have is that we’re not fully focused to get out of them. But everything else can wait. 

You don’t have to buy that new car or upgrade your phone. Take your time to do some debt consolidation and make a plan for payments. And every time you reach for that credit card, you’re adding debts instead of subtracting. 

When it comes to debt management, you should develop a tunnel vision. Think about other financial purchases when you’re debt-free.

Jumping In Without A Budget

If you want to get out of debt, you should create a budget and follow it religiously. Prioritize on your main financial needs like food, housing, healthcare, education, and insurance before you make payments on debt. Minimize your expenses on entertainment, buying new clothes, etc.

Neglecting The Root Cause Of Debt

Before you implement your debt reduction strategy, you should address what made you get into debts. Perhaps you’re making unplanned expenses like car repairs. If you’ve lost your job, you should look for ways to minimize your expenses. Avoid living beyond your means.

Forgetting To Save For Retirement

While you may want to commit every coin to debt, this can be a costly mistake in the long-run. This is usually a gray area since most people struggle to save for retirement. No matter how much you make, make sure you save 5-10% for your retirement. 

Scaling back on the amount you make will also make a big difference in your take-home pay. This will help you pay your debts as you grow your retirement savings account.

20 Ways To Get Out Of Debt

If you’re staring at a mountain of debts, you can still find your way to financial freedom. Here are the basic principles on how to get out of debt.

1. Use The Debt Snowball Approach

Debt snowball method prioritizes your debts from the smallest to the largest regardless of the interest rate. When you have the right numbers, you can wipe your debts faster even before you know it. Be sure to make the monthly payments you can afford. 

As the name suggests, your amount snowballs every month. Having small wins early will motivate you to follow your debt reduction plan. This approach is based on behavioral modification.

2. Use The Debt Avalanche Method

This method prioritizes debts with the highest interest rate. Your goal is to minimize interest rates and put more cash on the principal. When you borrow money, the interest rates increase the cost leading to higher monthly payments.

3. Get Rid Of Your Credit Cards

There’s nothing more frustrating than paying a debt only to realize that you’ve increased it through a credit card. If you have a bunch of credit cards, its time you get rid of them. 

To reset your spending mindset, you should stick to cash and debit cards. Make sure you revisit the issue from time to time.

4. Sell Your Car

Before you sell your car to pay your debts, evaluate how much it’s costing you. Think of costs in terms of insurance, rising gas prices, parking fees, maintenance, and more. You can replace your high-end car with a cheaper model. Also, you can evaluate whether your family can manage with one car instead of two.

5. Stop Going Out To Eat

Eating at an expensive restaurant can take a chunk of your budget. The easiest way to pay your debts is to break the fast-food habit. You’ll be surprised how much you’ll save at the end of the month.

6. Create A Monthly Budget

A budget will help you identify where your cash is leaking and make the necessary arrangements. Figure out how much you make, define your core expenses, and do your debt consolidation. Make sure you assign reasonable limits on each item.

7. Avoid Impulse Buying At The Grocery Store

Take time to make a list before you head to the grocery store. If your weekly menu for dinners is ready, grab a few ingredients that won’t ruin your budget.

8. Give Up Expensive Hobbies

You can put your hobbies on hold to pay off debts. It doesn’t make sense to spend $200 when you’re struggling to pay off your debts. Take lower-cost options like a monthly book club or watch YouTube videos.

9. Freelance To Earn Money

If your salary is not enough to meet your debt obligations, you can start freelancing. Sometimes, you can make a substantial amount of cash which can go to your debt. You may even consider trying to get a side job like we discuss in this article.

10. Learn To Say “No”

When your co-workers invite you for a couple of drinks, say no if it doesn’t fit in your budget. Suggest a game night at your place and spend quality time with your colleagues.

11. Negotiate Your Credit Card Interest Rates

Due to the high competition of credit card companies, you can always get the best rate out there. If you’re a long-time customer, you may want to ask your service provider to reduce the interest rates. Just show them you’re a loyal customer and you’d like to stick around.

12. Stop Investing

It makes more sense to hold your investments to concentrate on paying your debts. Once you’re debt-free, you can continue with your investment to match with your employer 401(k).

13. Get A Part-Time Job

If you have a high-interest rate debt, you should consider getting a second job. Start that pizza delivery job or become an Uber or Lyft driver. Did we mention the article we have on the different side job ideas?

14. Use Public Transport

Fuel is one of the biggest expenses if you use your car to go to work. Use the public transport system to cut your costs. These savings will go towards your debt.

15. Cut The Cable

As long as you have a goal, you can cut the cable to service your debt. You’ll be surprised how fast your debt will start rolling.

16. Pay More Than The Minimum Amount

When you increase the monthly payments, you’ll save on the interest rates of future payments. Before you get started, make sure there are no prepayment penalties.

17. Sell Whatever You Don’t Need

If you want to drum up some cash, you should take care of things that you don’t need. It makes sense to sell your stuff to pay down your debts. You’d be surprised how much some people will pay for the stuff you don’t use anymore. See how other people are doing it on EBay and Amazon. 

18. Don’t Let Windfalls Blow Away

When a good opportunity comes your way, don’t waste it. That holiday bonus can pay a huge amount of debt. Do you get money from your tax returns? Use some or all of that if you have to as well.

19. Break Up With Your Barista

If you love coffee, you could be spending a lot of money in that fancy coffee shop. You can now brew your coffee at home.

20. Earn More At Your Job

Volunteer to work at your place during weekends and holidays. As you ask for your salary increase, show your accomplishments. The additional income can help you service the debts.

Bonus Tip: Add An Additional Stream Of Revenue

Adding an additional stream or two to your income is something we all could benefit from even if our debt isn’t massive. Read our articles on what passive income is and how to earn it. Then make sure to check out our article on side jobs if you simply want even ore ideas that will boost your overall income.

So, do you really want to get out of debt? Well be sure to take action and follow the above tips so you can become debt-free once and for all.

Are You Ready To Take Action?

Start with educating yourself a little further by checking out these books that go into even more detail of what we’ve discussed above. Now that you have some grounding on ways to get out of debt, make sure you take it a step further by also becoming more financially literate.

Just How Out Of Control Is Debt In America?

If you’ve made it this far, then here’s a fun little cartoon that will give you even more depth and understanding of how debt works.