Some people are so deep in debt that they’re gaining more debt to get rid of old debt. In 2021, the average person carried the following debt:
- Credit card: $5,221
- Personal loan: $17,064
- Auto loan: $20,987
- Student loan: $39,487
- Mortgage: $220,380
And it’s only going to get worse.
The Federal Reserve’s borrowing rate is expected to rise again to 5-5.25%, which is a 17-year high. Projections show that this current estimate could go even higher.
This means that unless you have a fixed interest rate, you’ll be paying more on things like mortgages and credit cards, making your debt even harder to get rid of.
Don’t give up yet, though. There’s a way to dig yourself out of the debt hole you find yourself in. But, if you aren’t motivated to help yourself, you’ll never escape. Got it in you? Then read on and learn how to become debt-free in ten steps.
How to Become Debt-Free on Your Own
Here are 10 steps you need to take to become debt-free. It will take effort but anyone with grit and determination can get there. This “how to become debt-free” guide will work even on a low income.
1. Set a Budget and Stick to It
This step may be the hardest to do. Articles on how to get out of debt tell you to create a budget, but they fail to emphasize that you have to STICK TO IT or it’s useless. The only exception to this rule is when emergencies occur.
What trips most people up is being a few months into living their new budgeted lifestyle and wanting to break from it to have something new or do something fun.
You’ve got to stick to it.
2. Organize Debt Part 1: Debt Avalanche
Debt Avalanche is a term used for paying off the highest-interest debt first. Using this method, people pay the minimum amount on their other debt and put any extra toward the high-interest debt. The idea is to eliminate the highest interest first, move to the next highest, and so on.
If you feel disciplined and motivated enough, this is an excellent method for successfully paying off your debt. As soon as your high interest debt is handled, the momentum speeds up creating a landslide to bury your debt.
3. Organize Debt Part 2: Debt Snowball
Debt Snowball focuses on getting rid of the smallest debt first. Interest rates don’t matter with this method—it’s about the entire balance. People pay off that small amount, then move to the next smallest. So, like Debt Avalanche, a person pays the minimum amount on their other debt and uses the extra to pay off the smaller balances first.
This method is appropriate if anyone is unsure about their ability to stick to the strict getting-out-of-debt life. They’ll achieve goals faster, see balances drop to zero, and stay motivated longer, making the exercise a downhill ride to becoming debt-free.
4. Use Savings to Pay Off Debt
If you have a small debt you want to eliminate, just take a few hundred dollars out of your savings to pay it off. The point is to make money work for you, not the other way around. Eliminating that debt and its interest rate is more productive than having your cash sit in a vault somewhere, collecting the pathetic interest a bank offers.
5. Consolidate Loans
It’s easy to get overwhelmed by the amount of debt you’re carrying, not to mention the extra burden of those rising interest rates. One solution is to consolidate your loans.
If eligible, you can get a personal loan called a debt consolidation loan. This loan offers a lower interest rate than most other types of debt—especially credit card debt. This way, you can put all your debt in one place instead of owing to multiple institutions.
Some people suggest transferring credit card debt to a balance transfer card because these cards don’t have any APR for a short time. But that can be a problem. Unless you pay off the debt within the specified time, it’ll come back and bite you—potentially at a higher interest rate than you started out with.
6. Use Windfalls on Debt
You can’t budget for windfalls like tax refunds or inheritances. While receiving unexpected extra money is always awesome, if you want to get out of debt, you’ve got to commit to using these windfalls to pay it down.
Think about it like this: You didn’t have or expect that money, and you don’t need it at the moment unless an emergency comes up. Throw that extra money at debt to make it disappear.
7. Find a Mentor
It’s easy to get overwhelmed when you think about trying to get out of debt. Ask someone you know and trust who has been in a similar place to be your mentor.
You should also seek help outside your personal bubbles. Some people prefer to do this because they’re embarrassed about their debt. There are many classes hosted by people who have been in the same place and want to help others achieve the financial freedom they desire.
8. Make More Money
It’s simple: More money means less debt. Ask for a raise, start a side hustle, sell things that aren’t needed, get a part-time job—these are all valid ways of making more money. No one likes stacking up more and more hours of work, but carrying a bunch of debt is going to be much more taxing than picking up a couple of extra shifts.
Suck it up and you’ll enjoy life a lot more without debt. Working more may be hard, but so is carrying a mountain of debt. Be smart, not lazy.
9. Stop Buying Stuff
How much random junk do you have collecting dust around your house? You’ve got to stop chasing that temporary high of buying something new and focus on getting rid of your debt. Ask yourself “What do I have to say NO to in order to say YES to what I want the most?” Say no to retail therapy. You simply don’t need whatever it is you think you want.
10. Try Settling Debt
Do you realize you might be able to negotiate a lower debt amount? All you need to do is call your creditors, start negotiating, and create a new debt settlement. You might be eligible if you have a good relationship with your creditors and have paid your bills on time.
Settling debt isn’t a quick process, especially if you do it independently. You can pay a company to negotiate for you, but that’s an extra expense, so it’s worth trying on your own first.
Be aware that creditors may ask you to stop paying while negotiating, which can damage your credit score.
Start Getting Out of Debt Today
You need a lot of determination and self-restraint to get out of debt, but you don’t have to do it alone. By joining a mentoring course from Derek Moneyberg, you can learn how how to earn more money, protect that money, and USE IT to crawl out of debt and launch into compounded wealth. All mentoring students get weekly live calls and an invitation to join an exclusive Discord chat where other students support each other.
Take control of your life, starting now.