You are taking a HUGE step in your life. Congrats! It’s so awesome that you want to get out of debt and are willing to seek knowledge on how to do it. If you want to go from confusion to clarity, then do these 10 steps. Don’t skip any.
The journey is tough but so worth it. Debt freedom is yours! Happy debt-crushing! Download the printable of this list and the debt-free pledge so you or a loved one can use it at home.
1. Get your mind right.
First, forgive yourself for having so much debt. And exhale. Perhaps your parents or guardians didn’t teach you proper money management. Forgive them, too. From now on, do not judge yourself for past mistakes. Debt does not define you. What you do with the debt does.
2. Declare your debt-free goal and create your “why.”
Say this out loud: “As of today, I am in control of my finances. I will not create new debt. I am striving to be debt-free by increasing my income, spending less than I earn and making extra debt payments. I want to be debt-free because _______________.”
Maybe your“why” is traveling or sending your kids to college loan-free. If you don’t have a strong, emotional reason for getting out of debt, then all of the budgets and checklists in the world won’t help you. When you lose motivation—and you will—remember your “why” to keep going. Repeat this declaration to yourself daily. Better yet: Write it on paper and sign it. You just made a debt-free contract with yourself!
3. Know your numbers.
Now that you’ve improved your mindset, you can tackle this scary step. Check your online accounts, pay stubs and bank statements to figure out your (1) monthly take-home pay, (2) monthly minimum payments and (3) overall debt balance. This debt prioritization worksheet will help. You cannot know where you’re going unless you know where you are.
“You cannot know where you’re going unless you know where you are.”
4. Get current on bills.
Communicate with your lenders to set up payment plans or ask for reductions in payment amounts and/or interest rates so you can get in good standing. Ask! The worst they can say is “No.” or “Maybe later.” The staff on the other end of the phone are human, too. If you can explain your story, then maybe they can help you devise a win-win situation where they get their money and you don’t lose your mind.
5. Lower expenses and start spending with intention.
Freeze, cut up or lock up your credit cards. Remember: NO NEW DEBT! Accept that you do not need everything you want. Go on a spending freeze for a week or two. End unused and underused monthly prescriptions. Replace cable with a streaming service. Plan a weekly menu and eat home-cooked meals instead of eating out daily. Sell unused items around the house. Become content with less and spend intentionally on what gives you great value.
6. Save a cash buffer.
You probably got into debt because you didn’t have enough cash to buy something. Am I right? Before making large debt payments, you must build savings of at least $500. $1,000 or 3 months of expenses is even better. Why? According to a Federal Reserve Board report, 4 out of 10 Americans can’t cover an unexpected $400 expense. You don’t want to go into more debt when life happens—you need to make a medical co-pay, fix your car or take a cross-country flight to see a sick relative. Prepare for emergencies in advance. Put your emergency fund in a different bank than your checking card and debit card so it will be out of reach.
Check out this post to find 10 questions to ask to determine your savings goal: Emergency Funds: Why, Where and How Much to Save.
7. Commit to a debt payoff strategy and estimate your debt-free date.
Keyword: Commit! Using your numbers from Step 3, decide which debt to pay off first. You can choose to do it by smallest balance, highest interest rate, strongest emotional pull or a combination thereof. Use online calculators or apps to estimate when you’ll be debt-free.
8. Create a debt-crushing budget and track expenses.
You have a worthy goal and a “why.” You’ve cut expenses. You know your take-home pay and minimum payments each month. You have a strategy. Awesome sauce! Now you can create your first debt-crushing budget.
The budget is simply aligning your money with your goals. You can still have lattes, but not so many that they impede your debt-payoff goals. Want to reduce debt by $500 each month? That should be in your budget. Each month’s (or week’s) budget should be different from the last and tailor-made to your circumstances. No repeats!
Use cash envelopes and separate bank accounts to curb excess spending and stay aligned with your goals. And, of course, track actual expenses against budgeted expenses to spot trends and make adjustments as needed. Budgeting takes months to get used to. Don’t quit too soon.
9. Earn extra money.
The higher the income, the bigger the debt payments. Get to work, work, work, work, work, work like Rihanna. Earn a promotion and a raise. Teach English online. Get a second job delivering pizzas. Drive for Uber. Sell clothes you knit. Your income-earning potential is one of your greatest debt-crushing and wealth-building assets.
10. Set up an environment to support your debt-free dream.
To crush debt, you must become almost obsessed, change your mindset and alter your lifestyle. Practice gratitude daily. Unsubscribe from store newsletters so you won’t be persuaded to shop. Set up subgoals for debt payoff (i.e. like reducing the balance by $5,000 in 3 months) and reward yourself with a free or inexpensive treat. Use visuals like a vision board or debt payoff chart to keep you motivated along the journey. Get accountability partners—in real-life or online. This journey is hard enough. Don’t do it alone.
Did I forget anything? Let us know what steps you took or are taking to get out of debt. Don’t forget to download the printable of this worksheet.