“Don’t have the money right now? Just charge it.” This has become the norm for too many of us. We can’t afford something so we purchase it with a credit card. We don’t have the money for a new car so we get a loan. We carry student loans for decades. We get sucked in to the buy now, pay later offers. You don’t even need a credit card or loan to go into debt. Just click a button and agree to a payment plan. Debt has become a way of life.

The average American household carries tens of thousands of dollars in debt if not more. Most of us can’t even account for it. We look at the balance and have no idea what we even spent it on. Whatever it was, we probably pay for it many times over after the interest is factored in.

Debt payments put a major strain on your budget, making it much more difficult to reach financial goals. The interest accrued as we make those payments almost makes it seem like we’re not making a dent, especially if you are making minimum payments.

Getting out of debt

Stop making it worse

The first step should be obvious. If your goal is to get out of debt, stop adding to it! If you don’t have the money for it, don’t buy it!

Revisit your budget and prioritize your needs. Comb over every item and determine if it’s a need or a want. Look for ways you can cut back on expenses and avoid unnecessary purchases.

Stabilize your savings

If you don’t already have an emergency fund, this takes priority over paying off your debt. If you don’t have money saved for emergencies, you will only make your debt problem worse if something happens.

You might consider a smaller emergency fund while you’re paying off debt, then go back to building it to a fully funded one of 3 to 6 months worth of expenses.

Dave Ramsey recommends a “baby” emergency fund of “1,000 while you are paying off debt. I prefer a higher number for this, at least 1 month of expenses set aside. My personal preference for a minimum is 3 months.

Whatever you decide, the emergency fund must be prioritized before you start making extra payments on anything else.

Make a list of your debts

You need to have an awareness of what you owe and how much interest you are being charged each month. Make a list of each debt, the total amount owed, the interest rate, and the minimum monthly payment. You can use your statements or online account access to find these numbers. It may be helpful to create a chart. Here’s an example:

Debt	Balance	Interest rate	Minimum monthly payment
Credit Card 1	$2,500	29.9%	$50
Credit Card 2	$3,500	27.9%	$65
Personal Loan	$5,475	4.9%	$209
2nd Car	$10,400	5.9%	$301

If you look at your statements, you will find a comment that tells you how much you will pay in total including interest, and assuming you don’t add to the balance, if you only make the minimum payments each month. It will likely also say how long it will take to pay off this debt if you do it this way.

Just being aware of how much more you will pay by making these minimum payments may very well be enough to motivate you to do something about it. Look at your budget and decide how much extra you can pay towards debt, choose a method, and stick to it.

Tackling the debt

There are multiple ways you can go about this. I do not recommend using debt consolidation companies. It may sound nice to have all your debts consolidated into a single payment, but this is not likely to save you any money and could possibly cost you more in the long run. This could also put you at risk for fraudulent activities since many of these companies are actually scams.

I also do not recommend spreading extra payments across all debt evenly. While this is better than nothing, it will take longer to see results and you’re more likely to get discouraged. Here’s a couple of methods I have used and they worked well for me.

Balance transfer: If you have decent credit, you may be able to open a balance transfer card that has a 0% interest rate for at least 1 year. You can then transfer the balances of other, high interest cards, giving you a chance to pay it off without accruing interest. (Note: there will be a one time balance transfer fee, but this is usually small in comparison to the amount of interest you will pay if you leave the debt where it is. And you should only do this if there is no doubt you can pay off the debt prior to the end of the 0% intro offer.)

Debt snowball: With this method, you make the minimum monthly payments on all debts except one. On the debt of your choice, put all extra funds available towards this debt to pay it off as quickly as possible. Once it’s paid, add all of the money you were paying towards the first debt to the next one in addition to it’s minimum until it’s paid off. Continue adding the extra funds to the next debt until all of them are paid off.

Whether you choose to pay off the debt with the highest interest rate, smallest to largest, or largest to smallest, is up to you. Personally, I prefer the smallest balance to largest balance method. You will begin to see results faster and are more likely to continue the process. The longer it takes to see results, the more likely you are to get discouraged.

Summary

• Stop making it worse by adding to your debt.
• Make sure you have an emergency fund.
• Make a list of all your debts including balances, interest rates, and minimum monthly payments.
• Avoid “debt consolidation” companies.
• Decide if a balance transfer option is beneficial.
• Use a debt snowball until all debts have been paid.

Once you are completely debt free, stay that way. Build your emergency fund to a full 6 months of expenses. Don’t buy things you don’t already have the money for. Save for things outside of your monthly spending allowance. And most importantly, now that you are debt free, set goals for your future and start working towards them.