Debt is the No. 1 roadblock that stops most Americans from reaching their financial goals. And those who are already struggling with existing debt have likely found their situation exacerbated by the coronavirus pandemic, which left millions of Americans without jobs. Fortunately, just because you have debt now doesn’t mean you are doomed to be paying it off forever.
I spoke to financial experts and business pros about the best ways to save yourself from debt disaster — here’s how you can turn your financial situation around.
Stop Taking On More Debt
“The first step to getting out of debt is to stop taking on more debt,” said financial expert Chris Hogan. “Folks need to understand that debt is a threat — it’s not their friend. You have to decide that debt isn’t an option. Remember that interest you pay is a penalty and interest that you earn is a reward.”
To stop taking on new debt, try to only pay for things with a debit card or cash so you’re only spending the money you actually have.
Close or Reduce Spending Limits on Your Credit Cards
Avoid Making Any Major Purchases
Not taking on more debt might mean that you have to delay major purchases.
“Prioritize what is most important today versus what would be nice to have,” said Amy Richardson, CFP, financial planner with Schwab Intelligent Portfolios. “This might mean pushing out a home purchase a couple of years or postponing a vacation. Making these hard choices today will provide peace of mind and help you achieve your financial goals for the long term.”
Once you’ve paid off debts, you can make it a priority to start saving for these purchases so you won’t have to take on new debt to make them.
“While it may seem easy to get the immediate gratification of buying that big purchase on credit, it creates a mountain of debt that takes away from the enjoyment,” said Steve Gickling, founder of ETLrobot. “I have found it much more gratifying to create a savings plan for a major purchase, pay for it with cash and then enjoy it knowing I don’t have to pay for it for the next few years. It takes longer, but it’s worth the wait to avoid debt disaster.”
Set Up a Budget
Having a plan for your money is an essential step in getting out of debt, said personal finance expert Rachel Cruze.
“If you don’t tell your money where to go, you’ll wonder where it went,” she said. “Your most powerful wealth-building tool is your income, so you have to get intentional with where every dollar is going. I recommend doing a monthly, zero-based budget. This is where your income minus your expenses equal zero. Every dollar has a name. You’ll quickly find categories where you’re over-spending and could be saving instead.”
Start by tracking your expenses.
“It’s simple and anyone can do it,” said Chris Manske, author of “The Prepared Investor.” “This will allow you to see what areas are causing your financial issues.”
Yenn Lei, head of engineering at Calendar, also emphasized the importance of creating a budget.
“A budget can help you avoid debt disaster by giving you a formal plan to follow about how much you have to spend and save,” he said. “Seeing it in writing holds you more accountable than if you didn’t have specific numbers for each spending category.”
Avoid Spending Temptations
“If you feel tempted to impulse buy and create more debt, then it is better to avoid going near the temptation,” said Jon Bradshaw, president of Appointment. “For example, stay away from retail stores. Order your groceries so you don’t impulse buy in the store. And get some hobbies that keep you off the internet at night so you are not tempted to hit the ‘buy’ button on Amazon or other online retailers.”
Heed the saying, “An ounce of prevention is worth a pound of cure.” Investing a little money upfront can save you from devastating debt in the future. A perfect example is disability insurance. Today, companies like Breeze are modernizing this segment of the insurance marketplace by offering long-term disability plans starting as low as $9 per month, without the pushy sales agents.
“Between a loss of income and the resulting medical bills, an unexpected disability can be financially devastating,” said Breeze CEO and co-founder Colin Nabity. “Disability insurance protects your source of income by replacing a percentage of your lost earnings if an injury or illness prevents you from working. It’s a key component of any American worker’s financial plan that can help prevent a debt disaster.”
Cancel Recurring Charges for Services You Don’t Need
“If you have recurring charges like gym memberships, magazine subscriptions and others that are billed to your credit cards, see if you can do without any of them,” said Nathan Hamilton, industry analyst at The Ascent.
Lowering monthly expenses will free up more funds to pay down debts.
“Little stuff adds up, which can count against you when little debts pile up, or it can count for you when you commit to little ways to save,” added Kelley Long, CPA, CFP, a personal finance coach and volunteer member of the American Institute of Certified Public Accountants’ Consumer Advocacy Council.
Don’t Give Into Lifestyle Creep
“As people make more income, they tend to spend less time counting what they owe and often start spending more — and doing so on credit — because they are making more,” said Chalmers Brown, CTO of Due.
This subconscious lifestyle inflation will just add to your debt burden.
Get Outside Help
If you’re struggling to create a budget that allows you to cover your expenses while paying down debt, don’t be afraid to ask for help.
“Ask a trusted friend or financial advisor to look over your budget and ask them to be brutally honest,” said Howard Dvorkin, chairman at Debt.com. “Take their suggestions and revisit them in a month to check on your progress.”
Come Up With a Payment Plan
“Create a payment plan that you can stick to,” Richardson said. “Pay at least the minimum on all debts and prioritize paying down higher-interest debt first.”
Focus On Micro-Goals
Having a goal to pay off your debt can seem overwhelming, but it’s easier to achieve if you break it down into smaller goals such as paying off one specific debt or dedicating a set amount of money per paycheck to paying down debt.
“It is important to understand your long-term goals, but try not to focus on planning your entire financial future right now,” said Brian Walsh, CFP at SoFi. “Instead, take an iterative approach to your finances. This entails identifying the most important action you can take over the next 30, 60 or 90 days to progress towards your goals. Then once that is done, you rinse and repeat. This iterative approach to your finances will help you focus on controllable factors and tend to lead to better outcomes.”
Try the Avalanche Method
There are several ways to tackle debt repayment, but Mack Bekeza, CFP at Millennial Wealth Management, recommends using the avalanche method.
“When it comes to creating a debt pay-down plan, one popular strategy is to itemize all of the debt payments by interest rate, starting from the highest interest rate to the lowest,” he said. “From there, start tackling the debt that bears the highest interest while making payments on the remaining debt. As you pay down these high-interest debts, you will gain more cash flow that can be used to tackle your other debt. Eventually, you can utilize your newly acquired cash flow to tackle your largest balance that is burdening you and your family.”
Focus On Saving Rather Than Spending
“Find additional ways that you can save money instead of spending money,” said serial entrepreneur John Rampton. “It helps to focus your mindset on what else you can save through an automatic savings plan or by even using an app for incremental stock investments. These are much more useful ways to ‘play’ with your money than buying things that only create debt.”
Choose the Cheaper Option
“Make comparisons and drop the expensive side,” said Steven Donovan, a financial coach at Even Steven Money. “For example, I can eat food bought a grocery store or eat food bought at a restaurant. Drop the restaurants. I can pay to have drinks with friends at a bar or we can do BYOB at home. Drop the bars.”
Always look for ways to save — but saving doesn’t have to mean living a boring life.
“Make a game of finding creative ways to feed and entertain your family to free up some monthly funds until you are on firmer financial footing,” said Dawn Starks, author of “Simplify Your Financial Life: 104 Easy Tips for Creating the Abundant Future You Desire.”
Have a Weekly ‘No-Spend’ Day
“Pick a day of the week when you are most likely to blow your budget — usually a Friday or Saturday — and refuse to spend any money that day no matter what,” Donovan said. “Every Friday morning, lock up your cards and cash and don’t pull them out again until the next day.”
Spend More Time Doing Things That Are Inexpensive or Free
“A new, inexpensive hobby can meaningfully change both your life and your finances,” Donovan said. “Reading, drawing and writing are great examples. Reading is particularly special because you can learn something valuable that ultimately increases your ability to make money. Other examples of new activities are meditation, yoga, learning a new language and playing an instrument.”
“I’ve seen people truly change their financial picture by changing their routine with a new daily activity that doesn’t cost much money,” he continued. “This new routine brings them in contact with different people and opens new doors. Choose to do this activity when you normally would be making unnecessary, budget-breaking purchases.”
Bring In Extra Income
“Find extra money and send it immediately to the debt so you can quickly get back to solid ground,” Donovan said. “There are a lot of podcasts and websites focused on how to be successful with a side hustle so that you have a little more money — take a moment to check them out.”
Sell Belongings You No Longer Need
Another way to generate more money is by selling unused items around your home, such as tech you no longer use or a designer bag you no longer carry.
“This will not only keep your home and or storage units from getting cluttered, but the proceeds can also be used to go towards any debt,” Bekeza said.
Check To See If You Have Unclaimed Property
You might have more wealth than you realize — and this extra money can get you closer to paying off your debts.
“When certain financial assets, such as closed bank accounts holding cash and unclaimed dividends, are not claimed by their owner/heir within a certain timeframe — usually a year, — financial institutions send these assets to the state of the property owner’s residence and label them as unclaimed property,” Bekeza said. “With 1 out of 10 Americans possessing unclaimed property, you may have cash or other assets that you forgot about. The National Association of Unclaimed Property Administrators is a great place to see if you have unclaimed property.”
Talk To Your Lenders
“Call creditors and ask for an APR reduction to potentially save money on interest fees,” Tayne said.
Move Debts to a Balance-Transfer Credit Card
“Stop wasting money on interest,” Hamilton said. “There are some excellent 0% APR balance transfer credit cards that will stop interest from accumulating on your debt, allowing 100% of your payments to be applied to the principal.”
Just make sure you pay down your debt during the zero-interest introductory period, which is typically 12 to 18 months.
Or Take Out a Personal Loan
In some cases, a balance-transfer credit card might not be the best option.
“If you can’t repay your debt within the next 12 to 18 months, consider a personal loan, which will often have a better interest rate than your credit cards,” Hamilton said.
Or Utilize Your Home Equity
“Depending on your income, credit history and cash flow, you might leverage [different] strategies to accelerate your debt pay-down plan,” Walsh said. “[Some people could] benefit from using the equity in their home in the form of a HELOC or cash-out refinance to lower their interest rates on credit card debt.”
Make More Than the Minimum Payment
If you are only making the minimum payment each month, you’ll never break the debt cycle.
“When you start seeing your debt rise, you can stop it from becoming a mountain by starting to throw more money at paying it down,” said Brian Burke, founder of Sell Your Mac. “You can get ahead of the debt with larger payments beyond the minimum due to help shrink the impact of interest piling up on the amount.”
Establish an Emergency Fund
Having money saved “just in case” will prevent you from needing to take on debt in the case of an unanticipated life event or emergency.
“Establishing an emergency savings fund is a great idea to keep your head above water and stay prepared for the unexpected,” Tayne said. “A few dollars each week can add up over time, and most banks have a recurring transfer feature so you can set it and forget it.”
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Gabrielle Olya contributed to the reporting for this article.