As of early 2015, the average American household owed $7,281 on their credit cards. And when you remove debt-free households from the equation — people with either no debt or no credit to speak of — the average debt load was more than double that, at $15,609.
Add in the fact that the average 2015 college graduate will leave school with more than $35,000 in loans, and it’s easy to see how so many people are struggling — and why some choose to bury their heads in the sand. For many in debt, the reality of owing so much money is too much to bear to face — so they simply choose not to.
But sometimes, disaster strikes and people are forced to confront their circumstances head-on. A series of unfortunate events — a sudden job loss, an unexpected (and expensive) home repair, or a serious illness — can knock one’s finances so off track they can barely keep up with their monthly payments. And it’s in these moments of disaster when we finally realize how precarious our financial situations are.
Other times, we just become sick of living paycheck to paycheck, and decide we want a better life — and that’s OK, too. You shouldn’t have to confront disaster to decide you don’t want to struggle anymore, and that you want a simpler existence. For many people, becoming debt-free the hard way is the best and only way to take control of their lives and their futures.
So if you’re ready to get on a path to financial freedom, it’s important to have a plan for how you’re going to tackle that debt!
- Make a conscious decision to stop borrowing money
If you want to get out of debt fast, you have to stop using debt to fund your lifestyle. This means no more financing furniture, no more signing up for credit cards, no more unsecured business loans for your startup, no more test driving brand new cars that you don’t have the cash to pay for. This will help you focus solely on the debt that you currently do have so that you can develop a game plan to pay it off quickly.
- Establish a starter emergency fund of $1,000
You might be wondering, “Why is having an emergency fund important”? Well, if you don’t have any money in the bank and an emergency does happen, how are you going to pay for it? For most people, credit cards become the funding source for those emergencies. If you are trying to get out of debt then you need to put a buffer between you and debt; that is exactly what an emergency fund does.
- Create a realistic budget and stick to it
Developing a budget that tracks your income and your expenses is crucial to getting out of debt in a short period of time. It will help you gauge where you are with your finances so that you can move forward toward your goal.
Creating a budget will expose whether you have money left over, which is called a surplus, or if you are in the negative, which is called a deficit. The goal is to increase your surplus and use that money to pay down your debt. Below are two ways that you can do this.
- The first way is to earn some extra cash. If you are in a commission-based job then this means that you need to make more sales, which will probably involve having to work more hours. If you are in a salary job and you are limited in the hours that you can work, then you might need to pick up a second job. When my wife and were toward the end of paying off our consumer debt, I was able to get a second job delivering pizzas which gave us the extra income we needed to hit our deadline of 18 months.
- The second thing that you can do is trim your expenses. Go over each line item on your budget and ask yourself, “how can I make this number smaller?” It may involve cancelling services that you rarely use like a gym membership, Netflix subscription, etc. It might even involve reducing the amount of times that you eat out at restaurants each month. The amount that you slash depends upon your commitment level to getting out of debt. The more committed you are, the easier it will be for you to give up some of the unnecessary amenities in life. You might not even need to sacrifice much if you can find these items or services for less.
- Organize your debts
This is paramount to mapping out a plan to pay off your debt. There are two approaches that are worth considering. The first is where you list your debts smallest to largest regardless of the interest rate. When we paid off our first debt it put wind in our sails. Even though we had higher interest debts, this gave us something that was very powerful: the belief that we could get out of debt quickly if we stuck to the plan.
If you choose laddering, put as much money as you can each month toward the card with the highest interest rate, while still paying the minimums on the other cards. Once that debt is paid off, move on to the card with the second highest rate and so on. But this is very important: Do not close the account once the balance is paid off. That will damage your credit. Just let the account sit at a balance of $0.
One other thing: if you have one or a few small debts, whether personal or short term business loans, you wipe out completely, go ahead and do that. That will give you some tangible progress to get started — and then start tackling the card with the highest interest rate.
- Throw any excess cash at your debt
When we were getting out of debt, there were several times where extra money fell in our laps that we had not factored into our debt elimination originally. We decided to take this cash and use it to tackle our debt. Some good examples would be a tax refund, selling a car, an inheritance, winning a bet, etc. The more cash you can put towards your debt, the faster it will disappear.
It’s easy to continue living in debt if you never must face the reality of your situation. But when disaster strikes, you can gain a brand new outlook in a hurry. It’s also easy to get sick of the paycheck-to-paycheck lifestyle, and look for ways to get out from under the crushing weight of too many monthly payments.
No matter what type of debt you’re in — whether it’s credit card debt, student loan debt, car loans, or something else — it’s important to know there is a way out. It may not happen overnight, but a debt-free future could be yours if you create a plan — and stick with it long enough.
No matter what that plan is, any one of these strategies can help you pay off debt faster. And the faster you become debt-free, the quicker you can start living the life you truly want.
Debt doesn’t have to be forever. Develop your financial game plan and start your journey toward being debt-free today.