How to Get Out of Debt

So many people have debt. According to the latest report in 2020, US Consumer Debt reached $4.21 trillion. Whether it’s student loans, car payments, a mortgage, or credit card debt, you’re not alone. Unfortunately, so many people feel shame about their debts. So the first thing I want to say is — don’t feel ashamed. You may feel guilt or regret for getting in a bad situation, but you’re not a bad person for getting in the situation.

The first step to getting out of debt is budgeting, which I wrote about yesterday. There are many ways to budget, so choose whichever works for you. Everyone is going to be different.

The second step may sound counterintuitive, but it makes complete sense when you really stop to think about it. SAVE FOR AN EMERGENCY before you start paying off your debt in full. That way, when you’re paying off your debt, if you have a situation like a broken-down car or a medical crisis, you won’t have to put that money onto your credit card! Some people say you need to be able to save between three to six months’ salary, but for the purposes of this, $1-3k should be enough.

Third, stop using your credit cards. Only spend what you can afford. You can use them again once you’re out of debt. Are your expenses more than what you’re bringing in? If so, how can you remedy that? Sometimes, giving up dining out often or getting Starbucks will only fix so much. Can you move to a cheaper place? Are you able you get by with public transportation? Can you pick up a job for nights and weekends or start a side hustle?

Fourth, take a look at your habits. Are you a compulsive spender? If so, get some help. Check out Debtors Anonymous.

Then, there are some simple things to plan before getting started. First, figure out your ultimate why and write it down. Put it somewhere that you’ll see it — like your wallet. For example, “I want to get out of debt so that ____.” Personally, I want to pay off my small amount of debt to start saving for a wedding, upgrade my house in the future, and for any future children. But since that’s quite a lengthy statement, I wrote down,” I want to get out of debt so that I can start a future with my future husband.”

You also need to set your goals, and the SMART Criteria is the most well-known.

  • Specific: A goal should be clear and simple
  • Measurable: You should be able to track your progress.
  • Achievable: It should be possible within the timeframe you choose.
  • Relevant: It should play a part in getting you closer to paying off your debt.
  • Time-Bound: You should have a deadline.

Let’s say I want to pay off my $4,000 debt within 10 months. I’ve estimated that I’ll have $400 interest max, so $4,400. That means I need to set aside $440 a month to pay towards my debt. That goal is specific, measurable, achievable, relevant, and time-bound.

So once you’ve figured this out, how are you going to pay off your debt? There are two popular strategies, and whichever one you choose depends more on your personality. One will give you more victories in the short run, but one will save you money on interest.

The Snowball Method

Make a list of all of your debts, from the smallest to the largest.

  • Visa — $1,000
  • Mastercard — $2,000
  • American Express — $3,000

(Of course, likely there will be car payments, a mortgage, or some student loans, but I’m using credit cards just for ease.)

You’ll pay the minimums on the Mastercard and American Express each month while paying all you can on the smallest amount — the Visa card. You’ll pay it off first and have a quick success, which will motivate you more in the long run! Then you’ll attack the Mastercard, then the American Express. This is a good strategy because you’ll be encouraged quickly as you go along. However, it may cost you more in interest.

The Avalanche Method

Make a list of your debts with the interest rates from highest to lowest.

  • Mastercard — 24%
  • American Express — 20%
  • Visa — 18%

You’ll continue to make minimum payments on the cards (or mortgage, student loans, car payments, etc.) with the lowest interest rates and tackle the debt with the highest interest rate first, paying as much as you can. This method won’t give you victories as quickly as the Snowball Method, but it will save you money in interest, which is quite important!

It depends on your personality and what will keep you going the most to choose between these two methods. Will you be more motivated if you have success quickly? Or will you be more motivated if you know you’re saving money in interest? I prefer the Avalanche Method, but that’s just my personal preference. (Besides, I also only have one small debt to pay off, so it doesn’t really apply to me.)

The moral of the story is that you can pay off your debts. You’re not destined to walk the earth owing money forever. And you shouldn’t feel ashamed of yourself for having debt. Most people do, in some form or another. You are not a bad person for having debt. There is nothing wrong with you, so do not look down on yourself. I know I don’t. Sure, I got myself into my situation, and I feel guilty for that, but I don’t feel guilty for being the person I am. I made a mistake, like millions of others out there. I’m just lucky mine was small. But there’s nothing inherently flawed about me for making this blunder. And there’s nothing wrong with you, either. So give yourself a break — especially if your debts aren’t on credit cards, but are student loans, a mortgage, or car payments. You’re doing all you can do! And I promise you that you can pay off your debts. You can do it! It just may take some time.


How to Budget as an Adult

I know, I know. This topic sounds thrilling. But as adults, we need a budget to get by. You may say that living with a budget is challenging. You’re dead wrong. Living without a budget is challenging. Having a budget doesn’t restrict you; it empowers you.

Decide what you realistically want from budgeting. Imagine your life five years from now after budgeting. How much will you have saved up? Will you be able to afford that dream vacation? The dream wedding? Can you afford to put money down on a house? Could you have paid off all your debts and still saved for what you want? Could you have started saving early for your child’s college fund? Maybe you have gotten a head start on your retirement fund?

There are plenty of ways you can budget. There are templates on Excel, budget books on Amazon with ideas and PDF files, apps like Mint and You Need a Budget (my personal favorite and the favorite in many budget books!), and probably so much more I don’t know about. You have so many options to budget that you can definitely find something you like! But no matter what you choose, you unquestionably need some sort of budget.

You can also use the tried and true Envelope Budget, which uses all cash, but is a little more complicated in our digital world. You have an envelope for each category and fill it with cash. You can’t go over the amount of money you have in each envelope. This may have been easier in the past when we paid things with checks, but now that we have automatic payments for bills (and you should have automatic payments to prevent late fees) taken out of our debit or credit cards, it doesn’t seem as feasible. Still, you could use this method with categories that aren’t bills, such as groceries, dining out, clothes, etc.

There’s also the popular 50/30/20 approach. You spend 50% on your necessities, 30% on wants, and 20% goes into savings. The only problem with this system nowadays is that often rent and bills cover more than 50% of your paycheck. However, this is a great budget idea, and you can always tailor it to make it your own!

When I talk about budgeting, I’m not talking about simply writing your transactions down after making them. Don’t just track expenses as you go. Instead, I’m talking about giving yourself a set limit in specific categories, tracking what you spend after you set a limit at the beginning of the month, and not going over it. You may not get it right for the first few months, but you eventually will figure out how it works for you, and you’ll get it together. (A simple way to do this is to track yourself for a week and multiply it by four, but you’ll notice all weeks are different.)

The question is not always Can I Afford This? Sometimes the question is Should I Buy This Even Though I Can Afford This? For example, how much money do you spend at Starbucks each week? Can you make coffee at home? Of course, if Starbucks is important to you, include it in your budget! Can you make your lunch at home to take to work? Can you dine out less and cook more? Can you get rid of cable and only use streaming services? You’re the only one who knows what your priorities are — and if Starbucks or dining out are your priorities, then you should absolutely keep them in your budget if you can afford it! Your obligations and priorities will look way different than somebody else’s. We only tend to feel guilt when we’re spending money when we don’t spend it in line with our priorities, or we know we can’t afford what we’re buying. What do you want your money to do for you?

It’s really tempting to start budgeting $50 for dining out when you spent $400 on dining out the month before. You may make it one month, but it’s not sustainable. Habits are changed in small doses. So don’t be afraid to go slowly if you do want to cut down on something you spend a lot of money on.

It’s also essential to save a bit monthly to be ready for unexpected expenses — maybe your car breaks down, or you have a medical emergency. Perhaps you just forgot you’re going to be charged for your Amazon Prime membership! The goal is to have at least one month’s money in advance, preferably more. I’ll be honest — I don’t personally have this yet myself, but I’m working on it. If you need to make more money, there are plenty of things you can do — there are so many side hustles these days that it’s ridiculous. A great place to look is Making Sense of Cents. And if you have debts to pay off, that’s incredibly important, as well as budgeting to spend less money.

There are a few easy ways I save money:

  1. LOVE Amazon. So I just don’t sign on. It’s difficult, but I know I’d buy something, even if it’s something I need.
  2. I’m challenging myself to a no-buy streak for the month. I told myself I could spend money on experiences (seeing friends, etc.) or essential things that I absolutely must buy, but I wouldn’t buy any frivolous items.
  3. I get my groceries delivered, or I pick them up. That way, I don’t find products that I just have to have around the store. Because if I go to the store, I always find so many things that I “need” when I actually don’t need them at all. I end up spending way too much money. Buying online doesn’t give me the chance to browse.

I challenge you to a no-buy streak for the rest of the month. If it’s a necessary product or an experience, that’s okay. But if you don’t need it, don’t buy it!

I also want to recommend You Need a Budget. It’s the absolute best budget I’ve ever used, hands down. They have a 34-day free trial (you don’t have to put in your credit card) to see if you like it before paying for it. I think it’s worth the money. It’s already helped me more than any Excel spreadsheet, Mint, or any paper budget I’ve ever used! (And I’ve used a lot of different types of budgets!) I like YNAB because it helps me avoid impulse purchases. After all, I can just check with my tracker first and see if I can afford it. It also allows me to recognize the things that are the highest priority to me and helps me figure out how to use my money to serve me best. Unfortunately, it does cost money. So even if you decide not to use it, the blog entries are invaluable! You should also check out the blog entries on Nerd Hacker. They’ve also been highly beneficial for me.

How else do you think you can save money by budgeting? Leave a comment below with some suggestions. I’ll include them in my money series this week!

I also want to give a quick shout-out to Adam and Rory, who joined my Patreon… thank you, guys! I appreciate you being so supportive! It means so much to me!!!