One of the most common financial questions is how to get out of debt. Digging out of debt can be painful—but the payoff is empowering. Just think: All that money spent paying interest on past purchases could be money invested for your future. But it takes a committed and consistent plan to get out of debt and stay out.
Finding yourself deep in debt can feel overwhelming and hopeless. But with some strategic steps, you can dig yourself out of the hole and get back on track financially. This comprehensive guide covers effective strategies to tackle big debt so you can regain control of your finances.
Take Stock of Your Debt
The first step is gaining a complete understanding of all the debt you currently have. Make a list of all your debt accounts including
- Credit cards
- Personal loans
- Medical debt
- Payday loans
- Mortgage
- Auto loans
- Student loans
- Any other outstanding debts
For each debt, note the following details:
- Original amount owed
- Current balance
- Interest rate
- Minimum monthly payment
- Creditor name and contact info
This debt inventory will show you the full scope of what you owe so you can start developing a payoff strategy
Cut Expenses
With big debt, creating some extra money in your budget to put toward debt is crucial. Take an honest look at your current spending and identify any areas where you can reduce expenses. For most people, the biggest budget items are:
- Housing
- Transportation
- Food
- Utilities
- Insurance
- Entertainment
See where you can trim spending even if just by a small amount in each category. Getting an extra $100 or $200 per month can make a big difference in your debt payoff. Consider downsizing your housing, eliminating subscriptions, limiting eating out, or temporarily reducing contributions to savings.
Increase Income
In addition to cutting expenses, increasing your income will accelerate debt repayment. If possible:
- Ask for a raise at your current job
- Pick up a side gig like Uber, delivery driving, freelancing, etc.
- Sell unused items around your home
- Rent out a room in your house
- Work overtime when available
Even an extra $200-500 per month from a second source of income can significantly speed up debt repayment.
Debt Payoff Strategy
With your complete debt picture and some extra money from trimming expenses and increasing income, it’s time to map out a debt payoff strategy. There are two main methods:
Debt Avalanche Method
This method focuses on paying off debt with the highest interest rates first, while making minimum payments on the others. By eliminating your most expensive debt first, you pay less interest over time.
Debt Snowball Method
This method targets your smallest debt balances first, regardless of interest rate. Knocking out some quick small “wins” can help you stay motivated. Then you roll the payments from your paid off debts into the next target.
Choose the strategy that fits your situation best and makes the most financial and psychological sense for you. Automate payments for at least the minimum on all debts to avoid late fees or hits to your credit.
Consolidate Debt
If you have high interest credit card or personal loan debt, consolidating it into a lower interest debt consolidation loan can accelerate payoff. This combines multiple debts into one overall payment at a reduced interest rate. Be sure to comparison shop rates as much as 2-3% lower interest can make a noticeable difference in how quickly you become debt free.
Some options for debt consolidation loans include:
- Personal loans from banks or credit unions
- 401k loan if your plan allows it
- Home equity loan or line of credit
- Balance transfer credit card (for credit card debt)
Weigh the pros and cons of each method carefully based on your specific situation.
Leverage Debt Payoff Tools
Take advantage of tools and resources designed to help tackle debt:
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Non-profit credit counseling – Get customized guidance on budgeting and strategies to address your debt.
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Debt management plan – A credit counselor can negotiate lower interest rates and fees with creditors and coordinate monthly payments from you to creditors.
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Debt settlement – Specialized debt settlement companies negotiate with your creditors for reduced lump sum payoffs, but this can damage your credit.
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Debt snowball calculator – Shows how long it will take to pay off debt using the debt snowball method. Helpful for forecasting and motivation.
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Budgeting apps – Apps like Mint help you track spending and follow a budget to put as much money toward debt as possible.
Maintain Motivation
Paying off significant debt takes time, often years. To stay motivated:
- Automate payments toward debts for set amounts each month
- Track your debt payoff progress in a spreadsheet
- Visualize being debt-free
- Celebrate small milestones
- Focus on the emotional benefits of less financial stress
Staying diligent and paying more than minimums is key to chip away at large debts.
When Debt Relief Is Needed
If you still struggle with unmanageable debt after trying these strategies, more drastic measures like debt settlement, bankruptcy or credit counseling may be necessary for a fresh start. The impacts on your credit score and finances vary, so fully understand your options before deciding on any debt relief approach.
Start Fresh
Once you’ve paid off your debt, be diligent about not sliding back into poor money habits. Live below your means, budget carefully, save for emergencies, and use credit cautiously moving forward. Getting out of big debt takes focus and determination, but regaining control of your finances is worth the effort for your peace of mind.
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Have money available for emergencies and unplanned expenses
Getting out of debt while having nothing saved for the inevitable emergency may leave you running in place. You do all the work to pay down debt and before you know it, the hot water heater springs a leak or your car suddenly needs an expensive repair. Without an easily accessible stash of cash, credit cards may be the only option.
Think of your emergency savings as a bill. With rent or mortgage payments, contributing to a retirement fund, and myriad living expenses, you already have a lot to balance. But if you turn saving for an emergency into a monthly priority, youll get in the habit of contributing to it regularly. Fidelity suggests starting by saving $1,000, and continuing to save until youve accumulated between 3 and 6 months worth of essential expenses.
Work to keep your essential expenses under 50% of your take-home pay, and be sure to save for the future too—contribute at least enough money to your workplace retirement account to get the entire match from your employer.
Money thats left over after youve met all your necessary obligations, built up your emergency savings, and obtained your entire employer match can be funneled into debt repayment, if you still have any left, or used to boost your retirement savings. Once you are out of debt, aim to ramp up your retirement saving to 15% of your annual income before taxes—including any employer match.
Read Viewpoints on Fidelity.com: How to save for an emergency
Pay more than the minimum on credit cards
Making the minimum payment on credit cards can leave you in debt for years. By paying just the minimum, a credit card balance of $1,000 at a 20% interest rate with a minimum required payment of $35 would take 42 months to pay off. Your total payments would equal about $1,482, which means youd pay $482—nearly half of your balance—to borrow money for 3½ years.
Bumping the payment up to $50 per month would pay off the balance in 23 months and cost $121 in interest. Paying $100 a month would pay off the debt in 11 months and cost $59 in interest.1
Review your spending Adding a little bit more to your monthly payment can help you pay off the debt in a fraction of the time. But heres the perennial problem—where can you find this extra money? Lets face it: Stumbling onto a pile of cash doesnt happen very often. Common sources of extra money include:
- Reduced spending
- Pay raise
- Bonus
- Tax refund
Finding spots in your monthly spending where you could cut back is the most likely source of extra money. The best way to find them is by examining your spending. Look at your spending history through your bank or cash management account, or track your spending for a period of time. You can also use Fidelitys Spending and Budgeting toolLog In Required to help you. After you see where your money goes, look for areas where you may be able to pare back expenses to free up more money to put toward debt—even just a little bit will help.
For example, you may be paying for streaming services you rarely use, or maybe you dont come close to your cell phone data limit. Maybe you dine out more than in, or order takeout more often than you cook. You dont have to give up all of your luxuries, but nearly everyone has areas where they splurge more than necessary.
Best Way to Pay Off Debt Fast (That Actually Works)
FAQ
How do I get out of massive debt?
The most popular solutions for people in your situation are: Debt consolidation and cut-off of credit until you’ve paid a considerable portion Balance transfer to a lower interest card Call your creditors and work out a payment plan with them The longer you wait, the worse your financial situation will become.
What is the 777 rule with debt collectors?
How to recover from huge debt?
Seek professional help to get out of the debt trap: You can approach professional debt counselling agencies that provide advisory services. They also offer repayment options. Counselling agencies help create a budget and set expenditure limits.
How to pay off $30,000 in debt in 1 year?
- Step 1: Survey the land. …
- Step 2: Limit and leverage. …
- Step 3: Automate your minimum payments. …
- Step 4: Yes, you must pay extra and often. …
- Step 5: Evaluate the plan often. …
- Step 6: Ramp-up when you ‘re ready.