A change in the calendar often brings a desire to make an adjustment to your lifestyle. If you’re in debt, your finances might be a good place to make that adjustment.
With Americans carrying an average debt of $90,460 and an average credit card balance of $5,733, getting out of debt is a common goal. However, many people don’t achieve it. You can be one of those who do, but you’ll need a plan to succeed.
Step 1: Face the music
The first step is to face facts. After all, you can’t deal with your current financial situation if you don’t know exactly what’s going on. So how do you deal with your finances head on?
Start by making a complete list of your debts. Write down how much you owe, to whom you owe it, your current interest rate, the due date and the amount you owe each month. List this information on a spreadsheet, a whiteboard, the back of a napkin, anywhere you can easily access the information. You need to know how much debt you’re truly dealing with and on what terms.
The second part of facing the facts is to look at your current income and spending habits. You need to know how much you’re bringing in and where your spending occurs each month. Spend time tracking every dollar, whether you put it on a credit card or pay cash.
This is a perfect time to get your spouse or partner involved, if you have one. It’s good for both of you to look at how much you owe and attack the debt together.
Step 2: Get a plan
Now that you have a clear picture of your debts, it’s time to develop your plan for debt payoff.
There are several ways to pay off debt. There are many debates over which strategy is best and the pros and cons of each method. Here is a snapshot of the most common payoff strategies.
The debt snowball method involves prioritizing your debts from smallest to largest. Pay off your smallest debt first, only paying the minimums on your other debts. Then proceed to the next smallest.
Successfully retiring one debt can give you the motivation you need to tackle the rest, as well as freeing up money to apply to your next debt.
The debt avalanche method requires you to pay off the debt with the highest interest rate first. Focus on that and pay the minimum amount on all others. When you’ve paid off that debt, you focus on the debt with the next highest interest rate.
You’ll pay less money over time in interest, but it can take a while to see progress.
While paying off high-interest debt is generally beneficial, it's important to avoid a couple of common pitfalls. First, avoid closing your credit card accounts once you've paid them off as this could reduce your overall available credit and increase your credit utilization ratio. Second, don't take on new debt once you've paid off your old ones.
Step 3: Commit to a monthly budget
No one said getting out of debt would be easy. To get out of debt you have to be ready to make tough decisions and stick to them. You have to stop spending money you don’t have and apply all available resources to pay down your debt. The best way to do this is to figure out what your monthly minimum payments are and try to add as much as possible on top of that.
The good thing about these strategies is that any “extra” payment will grow naturally over time as balances are paid off. So if you have a monthly minimum of $1,000 and you’re adding $100 extra on month 1 = $1,100 monthly budget. After you pay off your first account, your extra payment might grow to $200 while your monthly budget remains at $1,100. This is the power of following a strategy.
Step 4: Cut Spending
First and foremost, you must limit your use of credit cards. You can’t get out of debt if you keep piling on new debt. Don’t put anything on a card that you can’t pay off in full on or before the due date. You have to stop spending money you don’t have and apply all available resources to pay down your debt.
If you’re in the habit of using credit cards because you don’t have enough money to make essential purchases, work on building up an emergency fund.
Step 5: Commit, commit, commit
The only real way to get out of debt is to really want it, and that means commitment. Just like getting fit, you need to commit to a healthier lifestyle. Crash diets don’t work and it’s the same for getting out of debt. One of the best way to commit is to use technology and apps to help you.
This is where Otto comes in. Otto is a debt management app that brings everything you owe into one view and creates a tailored repayment plan that fits your budget. You’ll stay motivated with savings goals and always know the right amount to pay with recommendations for every bill. On average, Otto members save over $500 in interest charges in their first year!
Final Thoughts on Getting Out of Debt
Tackling your debt is a three-part process: Understand your debts, make a plan and put your plan into action. It’s not as easy as it sounds. It takes hard work, persistence and discipline. But with a solid plan and a willingness to make changes in your lifestyle, your goal of getting out of debt in 2023 can become a reality. The goal is worth the effort!