Creating your own get out of debt plan is possible, and with some fundamental changes to your lifestyle, you can get out of debt fast, even with a low income. It does require commitment and planning, but it gets easier over time as your debt levels drop.
We’ve created this guide to give you all the steps you need to have the best chance of paying off your debt as quickly as possible:
Before you do anything else, put a stop to any further borrowing. No more swiping credit cards, no more loans. Don’t even think about consolidation or balance transfers at this point—don’t trade one kind of debt for another until you understand your situation and have a plan.
When we counsel people entering a debt management plan, we take their credit cards and cut them up. It’s a dramatic moment, and it’s crucial to starting a new phase of life without taking on new debt.
The root change that has to happen here is to change your attitude toward money and debt. Understand that every swipe of a credit card is a loan, and a costly one at that. Resolve to live on a cash basis while you change your money attitudes, uncover the root causes of your debts, and make the necessary changes to get out of debt fast.
Before you can know what budget cuts to make, you have to know where your money is going. You need to know this before even starting to create any budget at all. Tracking spending may be the most important early step to ensure your budget will be effective later.
Start keeping track of every dime you spend. And we mean every dime—if you put a dollar in change in a vending machine, jot that down somewhere so you can include it in your tracking.
To do the tracking itself, use the method that works best for you. And by “best,” we mean the one you will actually use. You could use a spreadsheet, a budgeting app on your smartphone, or keep receipts in a shoebox. Whatever method ensures you will keep tracking is the right method for you.
It’s best to track for at least a month, to account for all of your monthly bills as well as daily spending. And don’t forget to include your debt payment obligations in your spending.
Our free “Power of Paycheck Planning” seminar materials go into more detail about tracking, and you can download them for free from our website.
Budget in Writing (With Goals)
You’ll use the tracking you have done to create a new budget. This budget should account for all of your needs, and by using your regular spending as a guide, you’ll be sure not to forget anything.
The tracking will also show you some easy places to cut spending here and there. There will be expenses you don’t normally think about that you can cut painlessly, but there will also be deeper cuts you’ll need to make. Tracking is the best way to know where you’re spending too much and where to make cuts.
An extremely vital part of the budgeting process is to put it in writing. It’s not enough to mentally plan how much you’re going to spend—it has to be recorded in concrete form. Whether you use a spreadsheet, bullet journal, day planner, etc., don’t rush through this part.
It’s important to include written goals in your budget. Writing your goals down makes you 42% more likely to achieve them. For you, getting out of debt fast is probably your #1 goal, but don’t forget building an emergency savings fund as well. And after your debts are paid off, you can come up with more goals to save toward—just remember to add them to your budget in writing.
Implement a Payoff Strategy
Now that your spending has been tracked and your budget created, it’s time to implement a payoff strategy. If you need to pay off your debts fast, you’ll need a plan that maximizes your payoff schedule.
We often recommend some variation of a “debt snowball” approach. With this strategy, you pay a minimum payment to all but one of your debts, and put all of the rest of your funds toward the other one. When that debt is paid off, you choose another debt and put all of the extra funds toward it. Keep repeating this process until all debts are repaid in full.
Which debt you choose to focus on might depend on your situation, but usually with a debt snowball, one pays off the debt with the highest interest rate first, and then the next highest, and so on, until all the debts are gone.
Remember to keep the total amount you put toward debts consistent. If you are putting $300 toward debts each month, and you pay off one of the debts, you’ll still be paying the full $300 toward debts the next month. So if you have 3 debts, and you’re paying $50 to one, $50 to another, and $200 to the 3rd, you’ll pay $50 to one and $250 to another after you pay the first one off. Then in the end, you’ll be putting the whole $300 to the last remaining debt.
This method accelerates your repayment faster and faster as debts get paid off. That’s why it’s called a snowball—the repayment strategy gains momentum as the same amount of money goes toward fewer debts.
Pay As Much As You Can
If you’re looking to get out of debt as fast as possible, you should try to put as much as you can toward debts every month. We talked about how the total amount put toward debt shouldn’t go down after paying off individual debts, but there’s no reason the total amount you pay shouldn’t go up. In fact, it should go up every chance you get if you want to get out of debt fast.
When you create your initial budget, you will set a minimum amount that you are putting toward debts each month. Usually this should be 20% of your total income. If you can add to that amount in any given month, do so. If the amount has to drop back down the next month, that’s okay, as long as it doesn’t go below the original amount you budgeted for.
Any extra source of income you have could be potential funds for debt repayment. If people give you gifts, ask for cash instead. If you have a garage sale, or an unexpected bonus, don’t splurge with that money. Put it toward your debt repayment goal that month.
No matter what your situation, it’s important to pay more than the minimum required. Even if you have a terrible month with unexpected emergency expenses, pay more than the minimum if possible. Make this an ironclad habit. The only way to get out of debt fast is by paying more than the credit card companies want you to.
Consider Balance Transfers/Debt Consolidation Very Carefully
A lot of people think transferring balances or consolidating debt is a good way to pay off debt faster, but we want you to be careful with such strategies.
Yes, you can sometimes transfer a balance and get a 0% introductory rate for a while, but that transfer will usually come with an up-front fee. And if the introductory rate only lasts for 12 months, be sure you pay the debt off in full before the year is up. That’s why we’re only talking about balance transfers this low on the list—you need to know what your budget and debt repayment schedule looks like before even considering a balance transfer.
Debt consolidation loans might sound like an even better idea. But consolidating can leave you worse off than you started. We frequently see people who consolidate debt and forget Step #1 above. When you have 5 credit cards maxed out, and you consolidate all of them into one debt, you suddenly have a lot of very tempting accounts with 0 balances. So instead of focusing on the one new debt they’ve created, people take advantage of their now-paid off credit cards, and end up in an even worse situation than before.
We think a better option is to consolidate debt payments rather than consolidating debts. So instead of getting a new loan, use a Debt Management Plan and make one payment every month. You get the convenience of only having to make one payment, but without having the danger of incurring any new debt.
There are other ways to transfer debt that seem attractive to people that we urge you to avoid. Namely, using home equity loans to pay off revolving debt, or dipping into your retirement savings.
The basic rule here is don’t trade good debt for bad. Mortgage loans are good debt; they keep a roof over your head and help you build wealth steadily over time. Credit cards are bad debt. So don’t use up the equity you’ve built through your good debt to address your bad debt. In our experience this is a short-term solution that leaves people worse off than they started. Use home equity to pay off revolving debt now, and someday you’ll be back in debt with no equity to draw upon. You’ve just put your home at risk to temporarily get your head above water.
It’s better to stick with our steps; stop borrowing, learn to budget, and change the habits that got you into debt in the first place. Dipping into retirement or home equity doesn’t do anything to address the causes of your debt situation.
Renegotiate if Possible
This is a popular recommendation among financial experts—try to get your credit card company to lower your interest rate.
All you have to do is ask. Give them a call, and request a lower interest rate on your credit cards. As long as your payment history is good, you have a chance of getting some relief.
Another thing you can renegotiate is fees. If you have late fees or other charges, see if your credit card company will waive them for you—maybe they’ll do this instead of lowering your rate if you ask about the interest rate first.
Other bills can be lowered with a phone call. Do you have premium add-ons to your cable bill? Are you paying for more cell phone data than you use? Call those companies and talk to someone about lowering your bill. Most of these companies will want to keep your business and will offer some other option to get a lower monthly payment.
You can also talk to your insurance company about getting a lower rate on auto, homeowner’s or renter’s insurance. Don’t be afraid to shop around at other insurance companies. There’s little reason to feel any loyalty to your insurance company, and there is always a competitor who will offer you a better price to win your business.
When it comes to debts, your goal is to pay them off fast. So don’t fret too much if they tell you “no” to lower interest rates. Your plan is to pay them off soon and have no interest charges at all, so if they won’t budge on interest rates, just look forward to the day you’ve got that account paid off in full and you’re free from them altogether.
Involve the Whole Family
In over 40 years of counseling people with debt problems, we often see situations where one member of the family is responsible for all of the finances, and no one else in the household knows what’s really going on.
We urge you to avoid ending up like this. Come clean with your partner—if s/he doesn’t know your full debt situation, then you’re going it alone. And that’s unnecessary. Tell them about the debts, your plan to pay them off fast, and get them on board with your repayment strategy.
You need everyone in the house to participate in the tracking and budgeting steps. All the saving in the world does you no good if you live with someone who is spending without regard to the household budget. You have to involve them in this process and get them on the same page.
This might include some hard conversations. Your kids might have to accept a less-than-stellar Christmas this year. Or they might have to put off that big purchase they were hoping for.
These kinds of conversations can be a good thing, if handled correctly. Your kids can learn from the situation and gain invaluable money management skills if they are part of this process. If they wanted a major purchase like a new bike or game console, have them create a written goal along with you, and start saving toward it. If they stay focused on this goal, they’ll be less likely to splurge elsewhere, and more helpful to you when it comes to keeping the family on budget.
We talked about how you should put any extra income you have in a given month toward debts. This kind of flexibility is vital to success in the long run, and will keep you on track if things go south.
What if you have an unexpected loss of income? You’ll have to adjust. And if you’ve done all of the prep work and put your budget in writing, it will be easier to make the necessary adjustments.
Don’t be afraid to start completely from scratch and create a whole new written budget. Start with your new income levels, and your debts as they are now. If your life changes, change your plans along with it. But use what you’ve learned so far when you create your new revised budget.
You might be able to “course correct” temporarily if things have gone off the rails. Even one month of living really lean can help you catch up financially. You’ve probably already cut back on food spending at this point, but what if everyone in the house resolved to eat the cheapest possible meals for a few weeks? No more dining out, no more brand name breakfast cereals, just ramen noodles and generic oatmeal until you’re back on track with your budget.
Don’t be too flexible, though. Any wiggle room in your budget shouldn’t allow big, unplanned purchases. The process of getting out of debt fast means making sacrifices, so if you have a chance to score concert tickets, or a big discount on an item you don’t truly need, you have to say no. If you’re not committed to going without things you want, you’ll never succeed in getting rid of your debt.
Don’t Give Up
We’ve helped millions become more financially literate and reduce their debt over the past 40-plus years. We know it’s possible to get out of debt no matter how tough it might look.
One important thing we’ve learned is that income doesn’t matter. High-income people can stay mired in debt their whole lives, and people with low incomes can live debt-free. It’s not about how much money you make. Your spending habits can be adjusted to match your lifestyle, and the sooner you develop those good spending habits, the better.
All of us hope to be able to retire some day, but to do so, we’ll all have to be prepared to live on a fixed income. The longer you live with bad financial habits, the harder it will be to make that transition in retirement. Your current get out of debt plan isn’t just about getting through your immediate situation; it’s about building a foundation for the future.
Remember, there is qualified non-profit assistance available to help you. A financial coach can help you avoid foreclosure if you’re in danger of losing your home, or set up a debt repayment plan if you’re not having any luck going it alone.