Debt—considered one of the most stress-inducing words in the dictionary. It may be easy to get into, but working your way out of debt can feel like an impossible task. In a way, debt is like a jigsaw puzzle: you know it’s solvable, and all the pieces are there waiting to fall into place, but you just aren’t sure how to get the best start.
That’s why we’ve put together this easy-to-follow guide to jumpstart your journey to becoming debt-free. We’ll walk you through four simple steps to start tackling your debt and help you put all the pieces together.
Step One: Change the Way You Think About Debt
Before you can begin tackling debt, it’s essential to transform the way that you think about it.
For many, being in debt is a source of constant anxiety. Debt can make you feel isolated, overwhelmed, and hopeless. Despite these feelings, it can be reassuring to know you are not alone. According to Northwestern Mutual’s Planning & Progress Study 2019, the average American has around $29,800 in personal debt. Furthermore, debt is what enables us to reach some of our goals—whether it’s buying a home, sending our children to college, or starting a business.
The first step to tackling debt is to reframe how you think about it. Consider debt like you would think about an issue at your job or school: it may be hard in the moment, but it’s more than likely that with a little work and determination, you will one day get through it. Taking a more neutral position on your debt can help clear your mind and get you ready to tackle the next steps.
Step Two: Take a Debt Inventory
Take a deep breath. Next, gather your bills, open up your online accounts, and ready your tracking method of choice (a piece of paper, a Google spreadsheet, a Word document, etc.): It’s time to tally up your debt.
There are a few things you should be sure to note as you create your record. While your total debt (a.k.a., the overall amount of debt you have) is valuable to know, you also want to write down what kind of debts you owe, how much you owe on each account, any applicable interest rates, and your debt-to-income ratio.
Your debt-to-income ratio (DTI for short) is essentially how your annual income compares to your overall debt. In general, you calculate a debt ratio by dividing the amount of total debt by your gross annual income and multiplying the result by 100. The ensuing percentage will give you a benchmark for how much it will take to become debt-free.
For example, if your total debt amount is $20,000 and your gross annual income is $75,000, your DTI ratio is 27%.
Step Three: Create an “Extras-Free” Budget
For one month, track every time you spend money. Write down what the expense was for, how much you paid, and the date. After the month is up, pull out your list and cross out any spending that isn’t 100% essential—your daily visit to the coffee shop, lunch trips to your favorite fast-food chain, or your cable TV subscription. The remaining items will make up your “extras-free” budget.
While this streamlined budgeting approach will allow you to pay more towards your debt, how much (or how little) spending you cut is up to you. Maybe you can’t live without your favorite streaming service, or your Saturday movie date is your ideal reward after a long week. If that’s the case, feel free to keep a couple of “treats” in your budget, or—better yet—look into free alternatives! Having debt doesn’t mean that your life should be without fun. Just remember to cut back as much as you can. Once you’re out of debt—or a lot closer to your goal—you can start adding those “extras” back in.
Step Four: Set Realistic Goals
Establishing goals may be in vogue this time of year, but becoming a goals-oriented individual is fashionable all year-round. Goals empower us to break up significant challenges into manageable pieces that we can feel good about completing.
Using the “extras-free” budget you created and your DTI, determine how much you can realistically set aside each month for debt repayment. Then, divide your total debt by the monthly repayment amount. This total gives you the number of months it will take for you to become debt-free.
Using the example from above, if you can contribute $850 per month towards your debt and your total debt is $20,000, it will take you about 24 months (or 2 years) to pay it off.
Based on this timeline, set some goals! Of course, the first goal you set should be to pay off your debt, but setting smaller benchmarks to hit along the way will keep you focused. Maybe in 5 months, you would like to have paid $2,500 towards your debt. Or make every $5,000 towards student loan debt a goal post. No matter what your personal goals are, having small victories along the way will no doubt keep you motivated towards accomplishing your overall goal.
Despite the kind of debt you face—whether it be student loan debt, car loans, credit card debt, or something else—it’s essential to recognize that there is a way out. Though you can’t snap your fingers and dissolve your debt instantly, getting the best start possible will allow you to stick with your budget and goals through your entire debt-free journey!
If you’re struggling with developing your debt payoff plan, request a Free Debt Relief Evaluation. Our debt specialists understand that each financial situation is unique and will take the time to find the debt solution that is right for you.