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Updated December 7, 2018
Getting out of debt is a special kind of challenge. Paying down any substantial amount can seem insurmountable, especially in contrast to how easy it probably was to rack up.
Small amounts of overspending can add up fast. Spending a mere $5 more than you can afford every day will result in almost $2,000 in credit card bills after just one year — and that’s before accounting for the sky-high interest rates that will compound your obligation. And of course, big bills can appear out of the blue — an emergency medical expense or a job loss can drive you into debt fast.
Regardless of whether small purchases are adding up or you have a financial emergency crop up, your finances are in hot water if you are spending more than your income. Even if you are able to tighten your spending and pay what you owe, you’ll be back in debt in no time if you don’t fix the underlying problem, which could include:
- Carelessness with money
- Unmanageable fixed expenses
- Unstable income
Here are some tips to help you cut spending and get out of debt by steadily paying down your bills.
5 ways to trim spending and pay down your debt
1. Set up an ‘I love me’ plan
One of the best ways to reduce spending is to get a handle on where all your money goes and set limits on how much you can spend on each of your needs and wants. This may sound like a familiar concept, but it can help to reframe how you think about budgeting.
“I know everybody hates the ‘b’ word,” said Sonya Smith-Valentine, president and financial confidence expert at Financially Fierce, a financial training company. “But I don’t call mine a budget. I call mine an ‘I love me’ plan. In that plan, I’m trying to find every way possible to love me and keep my money in my pocket.”
Not sure where to get started? Check out these strategies for managing your money.
Still, the skinny of it all is this: You need to understand how much money is going in and out of your pocket every month. That means putting down in writing:
- Your monthly income
- Your recurring monthly costs (e.g. rent and insurance payments)
- Your typical spending on extraneous things (e.g. going out for drinks)
Once you have those numbers in writing, you can start thinking about how you’ll approach paying down your debt. You’ll also be able to see which expenses you can start trimming, whether that’s negotiating your bill payments or cutting back on eating out.
2. Identify and trim discretionary expenses
The first and most important way to bring your expenses down below your income is to cut discretionary spending. It’s easy to spend too much without realizing how much is flying out of your wallet. A coffee here, a new pair of shoes there; a movie ticket, a week’s worth of groceries, a car payment.
Some of your expenses are necessary (the groceries). Others are fixed and non-negotiable (the car payment), and even more are discretionary (the movie ticket). Some of your spendings may be downright frivolous (expensive chocolate) or even wasteful (bank fees you can’t account for).
Look for obvious things to painlessly cut. For example, you may consider:
- Buying generic-brand products instead of luxury products
- Forgoing a trip to the movies in favor of a home rental
- Cooking at home more often
With a little-determined effort, you can probably cut your spending noticeably without feeling too much pain.
Keep your eyes off ads and hands off your credit cards
Preventing yourself from making bigger purchases can take some real willpower. Online shopping can be a danger to those who have trouble keeping spending under control. One easy way to reduce temptation on this front is to unsubscribe from marketing emails that stores send you.
“Those emails are effective,” said Smith-Valentine. “Sometimes it’s just, ‘Oh, that shirt is pretty.’ It’s not that you need another shirt; your closet is full. It was 30% off. Unsubscribing from those emails can do wonders.”
It can also be helpful to delete your credit card information that’s stored in the website of stores you buy from often. If it’s more difficult to place an order, you’re less likely to give in to temptation.
Another way to keep yourself from buying when you shouldn’t is to put all your credit cards but one low-limit one in an inconvenient location. Simply deprive yourself easy access to all that juicy, enabling credit.
“The commercial is, ‘What’s in your wallet?’ That’s a good question. Take it out — you don’t need it,” said Smith-Valentine. “If I’m only walking with the $1,000-limit one, not the $8,000-limit one, I can’t get into so much trouble.”
3. Eliminate these ‘invisible’ costs
Nothing’s worse than paying for things you no longer want or need to be paying for, or are paying for by mistake. Keep an eagle eye out for these recurring costs that may be eating into your budget.
Many consumers are signed up for at least one subscription service, whether that’s cable service, a magazine, or the gym. It is particularly easy to sign up for digital services, too, which could put you at a higher risk of forgetting about an unwanted subscription.
And don’t forget about subscription services that offer a free trial period. Signing up for one and then forgetting to cancel your subscription could spell trouble for your budget.
There’s no good reason to be paying fees on a checking account, whether they’re monthly fees, overdraft fees or ATM fees. But these can be hard to spot and remember.
Smith-Valentine described to MagnifyMoney her own bank fee experience. “I noticed a fee going back a couple months and I was like, ‘Why am I being charged this $25 per month fee?’” she said. “I called the bank and they said, ‘Oh, we’ll eliminate the problem.’ It would have been about $300 for the year.”
That said, a quick call to your bank could have the fee reversed — but do you really want to be forced to keep your bank on a short leash? You may instead want to consider switching to a free checking account instead.
High credit card rates
It can never hurt to call your credit card company to see if they’ll lower your rate, especially if you’ve made on-time payments for the last year. They’ll be more likely to oblige if you pay a bit more than the minimum each month. For example, if the minimum is $25, pay $35 or more.
You may be able to secure a rate as much as a percentage point lower than your current rate, or potentially even more. One percentage point may not sound like a lot but, according to Smith-Valentine, “that’s still quite a bit of interest, depending on what kind of balance you’re carrying.”
Smith-Valentine also said that she’s seen people get their credit card company agreeing to rate reduction as high as 5%, just by asking.
4. Tackle these fixed expenses
Of course, not all expenses can be so easily managed. Most people have quite a few fixed expenses that they need to handle every month — mortgage payments, car payments, and student loan payments, for example. Some of these you won’t be able to budget, but others might have some wiggle room. You can even overhaul some of these if you’re willing to do what’s necessary.
One way of reducing your mortgage cost is refinancing your mortgage. Are current loan rates favorable? If your interest rate is at least a half-percentage point higher than current rates, it may make sense to refinance. Keep in mind that refinancing comes with fees usually totaling $3,000 to $5,000, so you’ll want to do the math to make sure it makes sense for your situation.
It goes without saying that if you can’t afford your monthly mortgage payment, refinancing isn’t an option, and there’s no way for you to increase your income, you may need to reconsider your living situation. That could mean getting a roommate or downsizing.
It’s a good idea to limit your rent payments to 25% of your gross monthly salary. One of the advantages of renting is that it gives you more flexibility than a homeowner, so if you’re spending too much, find out what’s required to break your lease and start looking for a place you can afford. If you lose a security deposit or have to double up on rent for a month in order to move out early, it may still be worth it if you’re able to secure far lower rent that you can keep for the long-term.
It may be difficult to get rid of an automobile you can’t afford. A car depreciates substantially the minute you drive it off the lot, so if you financed the entire car you likely owe more than your car is worth for a while right after you buy it. Once your loan amount is just a bit below the possible sales price, you can sell it and find a cheaper option.
Until then, if you have good credit and your loan balance is less than your car’s value, you can look into auto loan refinancing. Credit unions often have great deals in this space — they are often easier to deal with, and they tend to have incredibly low interest rates and none of the junk fees.
“Most people don’t realize you can refinance car loans as well,” said Smith-Valentine. “People should look into it especially if they have a higher interest rate.”
Are you overpaying on your insurance? That’s a question you need to consider. There are so many insurance purveyors out there that shopping around can bring you quite a lot of savings, especially for auto insurance. Progressive, for example, could be a good option for comparing auto insurance rates.
Regarding life insurance, if you have a whole life insurance policy, you are almost certainly paying too much. The purpose of life insurance is to make sure that people who depend on you can pay for their needs if you die. Life insurance is not designed to be a way to save for retirement or to give your children an inheritance. That means term life insurance is almost always the best option.
There are a few things you can do to change the amount you pay on your student loans. Look into getting on an income-driven repayment plan, which will match the amount you pay to how much you make. You can also refinance your student loans with a private lender if you have a relatively high interest rate.
If you have multiple student loans with different interest rates, it may be possible to combine them into one federal or private student loan. But while you may be able to qualify for a lower rate by refinancing or consolidating with a private loan, you’ll miss out on federal benefits. On the other hand, you may only consolidate federal student loans with a federal Direct Consolidation Loan, and the rate you get will be the weighted average of the loans you consolidate. Further, the Department of Education does not offer refinancing.
Other debt payments
If you took out a personal loan or charged up your credit cards to cover medical expenses or other costs, you may be frustrated by the interest you’re paying. High rates could make it harder to get out of debt.
In these cases, you may consider refinancing your debt or taking out a debt consolidation loan. Both refinancing and consolidating debt could help you get a lower interest rate and other more favorable terms. Consolidating debt has the added benefit of combining multiple debts into one. That means you’ll have just one monthly payment to handle instead of multiple monthly payments.
LendingTree, which owns MagnifyMoney, offers a debt consolidation loan tool you could use to explore your options for debt consolidation. You’ll need to enter personal information before seeing whether you qualify for any loan offers. Still, the tool could help you see what rates and terms you qualify for from reputable lenders.
5. Address the core issue
This last tip may be the hardest of the bunch: It’s all about ensuring you have long-term success with your finances.
Many people change their spending habits in minor ways or only temporarily and then expect their debt problems to resolve. But if your spending goes right back up after your short-term belt-tightening, or your income can’t cover recurring expenses you can’t negotiate, your problems will continue unabated.
That means you have two good options for ensuring long-term:
- Increase your income (asking for a raise, for example)
- Tightening your budget — and really sticking to it
This latter option may be the hardest to digest.
“It’s truly a mindset issue; you’ve got to truly shift your mindset,” said Smith-Valentine. “You’re not going to be successful at getting out of debt and reducing your spending if your mindset is still of the belief that you’re going to live your life exactly the way it is now.”
Despite the reams of information available out there to help people deal with their finances — including this post — millions of people are still in financial trouble. Obviously getting out of debt takes more than information; the mindset shift about how to approach spending is the missing ingredient for many.