It isn’t just the $5 cups of coffee. Or the $50 a month for the gym.
It isn’t just that new smartphone, or your shoe addiction, or even that pricey cable subscription. These are common things everyone likes to waggle their finger at when they talk about overspending. But it isn’t necessarily any one of those expenses that really gets people into debt. It’s usually all of them. And then some.
Though frivolous or impulsive spending can be part of the problem, the slide sometimes starts with the best of intentions — with the desire to get a college education, perhaps, or to own one’s own home. Although mortgages and student loans are among the leading sources of debt in the U.S., the number-one culprit, outside of homeownership, is credit card debt. In fact, almost a third of the average American’s monthly income goes toward paying off debts other than their mortgage — which is why it’s so important to have a plan for how to become debt-free.
Getting Out of Debt With Frugal Living
The key to how to be debt free sounds simple in theory, but it’s not always easy to put into practice: finding ways to spend less than we earn, thus avoiding the necessity of borrowing money that isn’t ours in the first place.
Of course, once you’re already in debt, getting out of it involves a concerted effort by finding ways to chip away at your existing debt while avoiding taking on even more — which can be difficult in a world where so many people struggle to make ends meet.
Recommended: Paying Off Debt—9 Strategies to Try
6 Ways to Climb Out of Debt
Fortunately, difficult doesn’t mean impossible.
1. Creating a Workable Budget
If you have a significant amount of debt to pay off and are looking at how to become debt-free, you’ll likely be looking to cut costs in a meaningful way. A budget can help with that. You have to know where your money is going in the first place to know how to create a plan for where you’d like it to go instead, and getting familiar with your budget can help you decide which expenses are worth prioritizing.
Your budget can also help create a feedback loop, as you (and your partner, spouse, or other family members) compare real-world spending to the numbers in the budget and consider whether to take corrective action to stay on track.
Over time, your budget can help you uncover the behaviors that have been holding you back: those areas of excess spending you didn’t even realize were adding up.
If the idea of tracking every penny has been a barrier to budgeting, or if you’ve tried and failed in the past, it may help to keep the process simple. The 50/30/20 rule is a simplified budgeting strategy that’s gained traction because it limits the number of spending categories a budgeter must establish and then follow.
After determining net take-home pay (what’s left after paying taxes), it breaks down the spending money that’s left into three buckets: needs, wants, and savings.
• 50% of the money goes toward needs, including housing costs, utilities, groceries, transportation, medical expenses, and any regular debt payments that have to be made (e.g., credit card bills or loans). From there, it’s up to whoever is creating the budget to determine what the true necessities are and what belongs in the wants bucket.
• 30% goes to those wants. That’s everything from grabbing takeout or keeping your Netflix subscription, to getting your car washed and detailed for date night. Logically, this is the portion of the budget that has the most potential for trimming, but emotionally it might require some real effort to get everything to fit the allocated funds.
• 20% goes to savings. This money might go into an emergency fund, some sort of savings account for short- and long-term goals, and/or an investment savings/retirement account. If you decide to pay extra toward your credit card or student loan debt, that expense also would go in this category.
The percentages are meant as a guideline, and they can be tweaked to fit individual needs. The key is to make a budget that’s strict but doable when figuring out how to become debt free.
2. Making More Money
Yes, this is easier said than done. But before rolling your eyes and moving on, consider the possibilities.
Is it time for a pay raise? If a bump is overdue, it might be time to have a talk with the boss.
Are there potential ways to make money from home? Do you always have nights or weekends off, and would your employer be OK with you taking on a part-time or occasional job for extra money? Maybe a friend does catering, landscaping, house-painting, or some other work and could use an extra hand from time to time.
Could a hobby become a moneymaker? Crafty folks can look into selling their wares online or at craft fairs and flea markets. History buffs could inquire about giving lectures or teaching classes. Animal lovers may want to offer dog-walking or cat-sitting services. Where there’s a passion, there’s often a way to earn income to help you become debt-free.
Recommended: 39 Ways to Earn Passive Income Streams
3. Applying Extra Money Towards Debt
If that raise comes through, or you earn a bonus at work, or you get a tax refund from Uncle Sam, instead of living it up while the money lasts, consider using it to pay down some debt.
A few hundred dollars might not feel like it’s making much of a dent, but every dollar you pay over the minimum can help reduce the interest you owe on a credit card or student loan.
To get some idea of how paying even a little extra toward a bill can help, consider playing around with the numbers using a credit card interest calculator. It might be scary to see how much money you’ll pay in interest if you keep on paying only the monthly minimum, but it can also be motivating to dump as much extra money as you can toward getting that debt paid off once and for all.
4. Consolidating Separate Debts Into One Payment
One way to consolidate debt is with an unsecured personal loan. You may be able to consolidate all or some of your debts at better terms, such as a lower or fixed interest rate and possibly pay them off in less time than you expected.
This strategy could be useful for those who don’t want to keep tabs on several bills every month. A personal loan can be used to consolidate multiple debts together into one manageable payment, which could help make it easier to keep tabs on what you’ve paid and what you still owe.
And because the interest rates offered for personal loans can sometimes be lower than the interest rates on credit cards, you could potentially end up paying less in interest over the life of the loan than you would have if you just kept plugging away at those individual revolving credit card balances.
Typically, the better your financial and credit history, the better the loan terms are likely to be, so it can be a good idea to check your credit record and make sure the information listed on credit reports is accurate.
Then look for a lender who offers the best terms to fit your needs. Keep the length of the loan in mind, as well as the interest rate and other terms to help you on the road of becoming debt free.
5. Controlling Credit Card Dependence
It could be difficult (okay, next to impossible) to stop using credit cards completely, since they’re commonly used for things like booking or holding flights, checking into a hotel, or making online purchases. But making a commitment to reduce credit card utilization could help you cut spending and reduce the amount of money that’s only going toward interest on those cards.
A credit card is a convenient way to pay, but if you can’t afford to erase the balance each month with a full payment, the interest can start piling up.
And though many credit cards make limited-time “no interest” offers, it’s good to review the terms in detail.
For instance, some cards may have terms stating if consumers don’t pay off the entire balance by the end of the promotional period, they may be charged all of the interest accrued since the date of purchase. Yikes.
To better the chances of staying in check, one option may be to consider recording all credit card purchases with a budgeting app or pen and paper and to try and face the costs in real-time, instead of weeks later when the bill arrives.
6. Focusing on One Debt at a Time
Seeing progress is inspiring for many people. Think about how good you feel when you lose a little weight from dieting or gain some muscle from working out. Even small wins can be motivating.
How does that apply to downsizing your debt?
Two of the commonly recommended approaches to debt repayment are the Debt Snowball and Debt Avalanche methods. These strategies vary, but primarily focus on paying extra toward just one balance at a time instead of trying to put a little extra money toward all your balances at once.
The Debt Snowball
The Debt Snowball method directs any excess free cash you might have to the debt with the smallest outstanding balance. Here’s how it can work:
• Start by listing outstanding debts based on what you owe, from the smallest balance to the largest. (Disregard interest rates.)
• Make the minimum payment on all other debts and pay as much as possible each month toward eliminating the smallest balance on your Debt Snowball list.
• After you pay off the smallest debt, turn your attention to the next-lowest balance.
• Keep going until you are debt-free.
The Debt Avalanche
The Debt Avalanche method targets the highest interest rates rather than the balance that’s owed on each bill. It’s more about math than motivation — you can save money as you eliminate each of those high-interest loans and credit cards, which should allow you to pay off all your bills sooner. Here’s how it can work:
• Disregard minimum payment amounts and balances, and list balances in order, starting with the highest interest rate.
• Make the minimum payment on all other debts and pay as much as you can each month to get rid of the bill with the highest interest rate.
• Move through the list one debt at a time until you pay off all the balances on your list.
Though the methods are different, both plans provide focus, and as each balance disappears, momentum grows. A newer approach, the Debt Fireball method, may be a better fit for modern-day debt, which could include a large amount of low-interest student loan debt.
The Debt Fireball
The Fireball method takes a hybrid approach to the traditional Snowball and Avalanche strategies. It’s called the Fireball because it can help blaze through bad debt faster by making it a priority. Here’s how it can work:
• Categorize all debts as either “good” or “bad.” “Good” debt generally refers to things that can increase your net worth, such as student loans or mortgages. (Interest rates under 7% could be considered good debt — rates above 7% would likely fall into the “bad” category.)
• List all those “bad” debts from smallest to largest based on each bill’s outstanding balance.
• Make the minimum monthly payment on all other debts and funnel any extra cash available each month toward the smallest balance on the Fireball’s “bad” debt list.
• Once that balance is paid in full, move on to the next smallest balance on that list. Keep blazing until all “bad” debt is repaid.
• Pay off “good” debt on the normal schedule while investing for the future. Apply everything you were paying toward “bad” debt to investing in a financial goal.
The Fireball makes sense mathematically because it gets rid of typically expensive (or bad) debt first, but it also provides plenty of motivation because momentum can grow as you approach the finish. These two combined elements could provide an extra boost to your efforts.
Avoiding Potential Traps When You’re Getting Out of Debt
Even with the best of intentions, there are some hiccups that can happen on the road to debt freedom. Keep an eye out for these twists, turns, and tribulations.
1. Debt Consolidation
As mentioned above, debt consolidation can be a great way to get ahead of multiple debts at once, potentially save money on interest, and simplify your day-to-day life. Paying one bill a month can be easier to manage than paying (and keeping track of) five or six.
But debt consolidation still entails being in debt. If you choose to consolidate your debt, make sure you’re serious about keeping up with your repayment schedule and keeping your newly paid-down credit cards at a $0 balance. Otherwise, you might just end up right back where you started.
2. Credit Card Balance Transfers
A credit card balance transfer can feel like such a simple way to tackle multiple credit card debts, especially if you don’t have any money saved up to help get the ball rolling otherwise.
But it’s important to pay close attention to the terms and conditions of that new card. You really don’t want to end up on the hook for all the interest you would have been accruing during the 0% promotional period. And even if you do pay it all off in time, you may have to pay a balance transfer fee, usually a percentage of the transferred balance, which can add a significant amount to your transferred debt.
3. Filing for Bankruptcy
When things feel truly overwhelming, you may find yourself wanting to pull a Michael Scott, screaming to the world: “I. Declare. Bankruptcy!!!”
For one thing, it’s not that simple — there’s a lot more paperwork involved. And for another, filing for bankruptcy can have a serious impact on your credit score for a long, long time. It can be a helpful option in some cases, for sure, but it’s worth considering whether a different option might do the trick.
The Takeaway
The deeper the hole you’re in, the longer it may take to climb out. But having the right plan in place before you start could give you a better shot at sticking to a budget, minimizing your dependence on credit cards, and methodically reducing your debt in a way that keeps you motivated and saves you money.
If you are looking for a way to help get a handle on your high-interest debt, one option is to look into an unsecured debt consolidation loan with SoFi. This option could allow you to consolidate your credit card and other debt into one unsecured personal loan with one fixed monthly payment.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOPL19072
