No matter how many years you have been in debt, you can still take steps to break the cycle and get your finances on track.
This simple five-step process to getting out of debt borrows inspiration from personal finance gurus such as Dave Ramsey and Suze Orman.
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1. Set up an emergency fund
Losing your job or facing a surprise bill can lead to digging yourself into more debt if you don’t have funds set aside to cover emergencies. Financial advisors tend to recommend having enough cash readily available to cover three to six months’ worth of your expenses.
Putting this money in a high-yield savings account allows the money to grow even while it’s sitting with the bank.
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2. Review spending and create a budget
As you commit to building an emergency fund, you can review your total debt and monthly expenses. Seeing where your money goes will give you opportunities to cut costs and free up space in your budget for debt repayment.
Maybe you’ll discover that you spend more than you’d like on dining out and subscription services, and making meals at home and cancelling a streaming service or two could put some extra cash back in your pocket. You can use that extra money to pay off debt.
You can also use your findings to create a budget that you can stick to, ideally lowering your current spending so you have leftover money to put towards your debt payments. You can create a budget with pen and paper, a spreadsheet or the help of a budgeting app such as YNAB.
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3. Assess your debt
Now it’s time to get a good understanding of your debt situation. List the balances and annual percentage rates (APRs) of your financial obligations.
Make sure you’re paying the minimum amount on all of your debts, then you can start aggressively paying off the remainder of the balances.
4. Choose a repayment strategy
Two popular strategies for paying off debt are the avalanche method and the snowball method.
The snowball method entails paying off your loan with the smallest balance first, then moving on to the second-smallest balance and so on. That way the small wins along the way will keep you motivated.
The avalanche method involves paying the highest-interest debt first, then moving onto the debt with the second-highest interest rate and so on. This method typically results in you paying less interest over time.
Remember that in both cases, you should be paying the minimum required on all debts.
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5. Prevent a debt rebound
You want to make sure you stop debt from reaccumulating while you’re paying off your debt. That may mean sticking to a strict budget, automating payments and only using one credit card instead of the several you were using before. (You can keep the remaining cards active with one small monthly subscription, if you want to build your credit history, if it makes sense for your overall financial plan.)
You should also avoid taking out loans or new credit cards as you pay off debt.
