If you’re staring down a mountain of debt, take heart in knowing you’re far from alone. The average American’s credit card debt comes in at $6,354, according to 2017 Experian data. Furthermore, U.S. residents are shelling out more than $100 billion to cover credit card fees and interest in 2018, a 35% uptick from five years ago.
But don’t let the numbers scare you. The silver lining here is that it’s more than possible to get out from under your debt in a reasonable amount of time — and finally start moving the needle on your financial goals. All it takes is some knowledge, the right strategy and a little bit of grit and determination.
Here are four expert-backed ways to get out of debt fast.
1. Review your finances
The first order of business is getting crystal clear on your current financial situation. If you’ve had your head in the sand up to this point, now’s the time to come up for air and assess the damage. Why? You can’t make a plan of attack until you know exactly what you’re dealing with.
Thankfully, reviewing your finances is a relatively simple task.
Begin by adding up all your monthly expenses, from your rent or mortgage payment and utilities to your cellphone bill and debt payments. You’ll also want to include discretionary spending (aka fun money) along with any non-monthly expenses that are unique to you, such as quarterly insurance premiums. (The fill-in-the-blank cheat sheet in our debt-free forever guide leaves no stone unturned.)
Once you’ve tallied the total, compare that amount with your monthly take-home pay. If you’re running into a negative number, it means you’re spending more than you’re making. That may mean you’ve been relying on credit cards to cover the gap. If you are in this boat — and are serious about breaking the debt cycle — you should be prepared to make some major changes to your spending.
Bill Schretter, a Cincinnati-based CFP and CFP Board ambassador, said that auditing your budget in this way should pinpoint why you’re in debt to begin with. Is your income enough to cover your fixed living expenses? Or can the problem be traced back to good, old-fashioned overspending?
“Create a personal spending plan,” Schretter said. “This is the chance to review your budget and see what expenses can be cut.”
This begs one important question: How do you define overspending? This should help put things in perspective:
|Common expense||Typical monthly spend|
A monthly payment that doesn't exceed 28% of your gross monthly income
A moderate food budget for a single adult ranges from $256 to $301 per month
It varies depending on your income, but the average annual spend is $3,203
It depends on where you live, the type of car you have and how much you drive, but the national average price right now is $2.88 per gallon
Your monthly expenses also include your debt payments. This is where your debt-to-income (DTI) ratio comes in. It essentially tells you how much of your income is currently servicing your debt. Those in the 40% range are on thin ice, but a DTI that’s 50% or higher is a bigger problem that deserves your immediate attention.
When half your income is being funneled toward debt, there’s little room left to cover your other bills and financial obligations. Our insiders said to shoot for a DTI that’s below 40%.
To calculate your DTI, use this formula:
100 x (total monthly debt payment / pretax monthly income) = DTI ratio
For example, if your minimum payments add up to $1,000 and you earn $4,000 a month, your DTI is 25%.
2. Prioritize repaying your debt
Now that you’ve reviewed your finances and revamped your budget, it’s time to get laser-focused on your debt. Unfortunately, not all debt is created equal. A student loan with a 4.00% interest rate is very different from a credit card that’s charging you 16.00%.
“The quickest way to get out of debt is to pay more toward the debt that’s charging you the highest interest,” said Steve Repak, a North Carolina-based CFP and CFP Board ambassador.
Repak is referring to what’s commonly called the avalanche debt repayment method. We’ll unpack a number of strategies shortly, but before you start making any moves, start by listing out all your debts to get a clear idea of what you’re up against. Schretter recommended digging up the following for each account:
- Name of each lender
- Current balances
- Minimum payment for each account
- Interest rates
You’ll likely have a mix of different types of debt. Once they’re all organized in black and white, it’s time to figure out which ones you should prioritize paying off.
Most experts agree that credit cards are the worst kind of debt. Having them in your wallet is a slippery slope — swiping a piece of plastic is dangerously easy if you don’t have a solid budget in place. What’s worse, credit cards have notoriously high interest rates.
We’re not saying credit cards don’t have a place in your wallet. Using credit responsibly is crucial to building a strong credit score and ultimately securing financing for cars, houses and beyond. The trick is paying off your balance in full each month, so you’re not getting charged interest.
Is it worth prioritizing first? Absolutely. Let’s say you’re paying $50 a month toward a $2,000 credit card bill with a 16.00% interest rate. If you don’t accelerate your payments, it’ll take you 58 months to pay it off, and you’ll fork over $877 in interest alone.
Student loans fall into two main categories: Federal loans and private loans. Federal student loans generally have fixed interest rates that are lower than private loans, according to the U.S. Department of Education. And since the federal government backs them, they also offer some unique borrower protections, such as the ability to defer your loans or enroll in an income-based repayment plan if you fall on hard times.
However, you may be able to score a great rate and ultimately save money in the long run by refinancing your student debt with a private consolidation loan.
“Once a loan is consolidated, it is privatized and no longer offers the same protections as federal loans,” said Schretter, adding that it’s still a viable option if the numbers make sense.
Is it worth prioritizing first? It depends. If your student loans, public or private, have higher interest rates than your other debt, it makes sense to prioritize them. Check in with your loan servicer to make sure there are no prepayment penalties.
Personal loans are installment loans that come with a fixed interest rate, monthly payment and repayment timeline. The most competitive rates and terms go to borrowers with high credit scores. In other words, it’s more than possible to have a super reasonable interest rate that’s lower than your other debt obligations.
Is it worth prioritizing first? If the interest rate is on the high side, it’s worth your attention from a dollars-and-cents perspective. However, if it’s comparable to your credit card debt, it makes more sense to pay those off faster since lowering your credit card balances frees up more available credit and, in turn, improves your credit score.
Your mortgage is a unique type of debt. While paying it off early and being free from that monthly payment is nice, mortgages typically don’t come with high interest rates.
Is it worth prioritizing first? If you have higher-interest debt or not much in emergency savings, throwing extra income at your mortgage may not be the best move. Even if you’re debt-free, you’ll likely get a better return on your investment by directing that money toward a tax-advantaged retirement account.
3. Pick a debt payoff strategy
Snowball vs. avalanche method
There are multiple ways to tackle your debt. The idea is to continue making your minimum payments across all your open accounts, but select one to hit the hardest with larger payments. Repak mentioned above that he’s a fan of the debt avalanche method, which puts your highest-interest balance at the top of the pile.
Once you eliminate that balance, you take whatever you were applying to that bill and roll it over to the account with the next highest interest rate. On and on you go until you zero out your debt. Schretter takes another view. He said to prioritize your lowest balance first, regardless of the interest rate. This is called the snowball method.
“You need to experience the satisfaction of paying off the debts,” he said.
The avalanche method will indeed get you out of debt faster, but the quick wins you get with the snowball method may motivate you to stick with your debt repayment plan over the long haul. (Our snowball versus avalanche calculator makes it easy to run the numbers.)
Those looking to get out of debt fast may consider using a personal loan to consolidate debt, especially if they can lock down an interest rate that’s lower than what they’re paying on their existing debt. Some loans tack on an origination fee, typically in the 1% to 8% range, but it may be worth it if you can drastically lower your interest rate. Compare up to five debt consolidation loan options by using our table below!
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4. Generate extra income
As we explored above, slashing your expenses frees up additional money that you can use to chip away at your debt faster. Upping your income is the other side of the coin.
“If you want to get out of debt as quickly as possible, you’re going to have to sacrifice some of your free time for side jobs,” said Repak. “At the end of the day, the more money you earn, the more you can put these large chunks of money toward debt.”
Side hustles take many forms, from driving for Uber to mowing lawns, waiting tables or freelancing out your professional skills. Repak also recommended going through your home and gathering up any items you haven’t used, touched, played with or worn in the last year — then selling them either online or with a garage sale. Every extra penny you drum up can help whittle away your debt.
What to do after paying off your debt
Crossing the debt-free finish line is a major accomplishment! It also shifts your financial perspective.
“You go from being a debtor to being an accumulator,” said Repak. “So instead of paying interest out, you’re going to start collecting interest for yourself by building up your short-term savings so you don’t go into debt again, and then saving up for retirement.”
While on the road to becoming debt-free, he suggested maintaining a mini-emergency fund of around $1,500 so that you won’t rely on a credit card to see you through a pop-up expense. Dial that number up to the equivalent of three to six months’ worth of expenses after you’re debt-free.
Once you’re ticking off those boxes, you can also start setting money aside for other long-term money goals, like saving for a house or taking a dream vacation. Being debt-free provides the financial freedom to really focus on the goals that matter to you most.
“Change your lifestyle, change your monthly spending, get some extra income coming in and follow a strategy to pay off your debt,” said Schretter. “That’s the best way to do it.”
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