Debt sucks. Sadly, too many of us are in debt. Many of us are in over our heads with the average debt over $230,000! Once we are in debt, it is tough to get out of debt. Heck, it’s even tough to admit to ourselves we have a problem.
Take me as a perfect example. I can remember the shame I carried around with me when I was in debt. I remember hating to get the mail, for fear the next bill was in there waiting. I also hated looking at my bank account, wondering how I was going to pay my credit card bill and still have money left to survive until I got paid again.
And debt affects more than just your finances. It has an impact on your relationships, your career, even your health. The stress that comes along with debt does nothing but harm every aspect of your life.
My Debt Story
So you can fully understand how to get out of debt, I want you to hear my story. I started to get into credit card debt my sophomore year of college. Up until then, I was great with paying my credit card in full each month. But sophomore year, I met a girl and began to go out to dinner more often and buy her things.
I ended my sophomore year with around $2,000 in debt. That summer, I had a summer job like I usually did, but I did something different. In the past, my summer job earnings were for the upcoming school year. I would save my money all summer and use it throughout the school year on books, groceries, etc. However that summer, I decided to pay off my debt. The problem with this was that come the start of my junior year, I had hardly any money for books!
While I was able to get out of debt that summer, I ended up in more debt during my junior year. This debt was again from me trying to buy love and the added costs of books since I didn’t have the money for them.
The summer between junior and senior years I worked again. But I didn’t pay off my debt. I only made the minimum payments. I didn’t want to pay it all off only to get back into debt during my senior year because I ran out of money.
So I carried this debt with me until I graduated college. In all, it was roughly $4,500 or so worth of credit card debt.
As a newly minted college graduate, the world was mine. I was expecting a six figure job to land in my lap and be vice president of the company in a few short years. When I couldn’t find a job, I started to get depressed. This wasn’t what I was expecting my life to be.
The outlet for my depression became shopping. I felt good shopping and buying clothes and electronics. The problem with this was two-fold:
- First, I was spending money I didn’t have
- Second, the “high” I was getting from buying things was wearing off faster and faster
Throughout this time, I kept lying to myself that I didn’t have a problem. When it got to the point where I couldn’t lie to myself anymore, I decided to take action. I opened up a second credit card.
The theory was to transfer my current credit card debt to my new card since it had a 0% balance transfer offer. I would stop spending and just work on paying off the debt and save money on interest charges at the same time.
It sounds simple enough, but it didn’t work. Instead of stopping my out of control spending, I just kept spending. Now I had 2 credit cards with a balance!
Again, thinking I would do the right thing, I opened up a third credit card to transfer my balance to so that I could again save money on interest. Sadly, the cycle continued. My credit card debt ballooned to over $10,000.
My Light Bulb Moment
Then one day, I was in a store trying on a jacket. I was about to buy it when the proverbial light bulb went off in my head. I thought to myself, “why am I buying a jacket? I already have 3 of them and I don’t even wear one of them. Buying this jacket doesn’t make sense and is a waste of money.”
That moment will stay with me forever. At that point, I was determined to get out of debt. I went home and rummaged through my closet and bureaus pulling out all of the clothes I had bought. I piled them onto my bed and took a picture to carry with me. I wanted a reminder of how I wasted my money. I took pictures of the electronics I bought too.
I began to work on myself, so that I could learn to love myself. I also started to see a therapist to help me with my depression.
I ended up getting a part time job so I could start paying something towards my debt. I eventually got a full time job as well and put my debt repayment into overdrive. After a little over a year, I was able to pay off my $10,000 in credit card debt.
There is hope to getting out of debt. I did it and many others have as well. (You can read their debt payoff success here.) While we all had our own ways to get out of debt, one thing is true among all of us: we took the steps needed to get out of debt.
How do you overcome your debt? The information below is going to walk you through everything you wanted to know from making sure you address the real issues to looking at the various options you have for debt help.
Laying The Foundation For Eliminating Your Debt
Before you can start paying off your debt, you have to get to the root cause of why you are in debt. Most likely it isn’t a spending problem but something else. For me it was a low self-esteem issue and a depression issue.
I was depressed that I didn’t have a job and that weighed on my self-esteem. I felt like a failure. I spent all this money to get a college degree and I couldn’t even get a job.
Instead of making the mistake like many people do (including myself) of treating the symptom and not the disease, you need to figure out the real reason for your debt. Otherwise, you are going to go through a mountain of effort to get out of debt, feel awesome for accomplishing your goal and then end up in debt again in the future. You may have even experienced this already.
This is the dreaded cycle of debt so many are in. No one wants this. After repeating the process a few times, you feel pretty much worthless and many times give up completely.
To avoid this, you need to stop treating the symptoms and start treating the cause of your debt. It’s like a person who gets chronic headaches tossing back Excedrin to dull the pain. They are simply treating the symptom when in reality something bigger is at play. They may come to find out that their headaches are from stress. If they manage their stress, they don’t get as many headaches.
Your overspending is the same thing. The overspending is most likely a symptom and not the cause. Maybe you are like me and it’s a lack of self-worth and buying things makes you feel worthy. Or maybe it is something else. Until you address this issue, you won’t be able to solve your debt problem.
Unfortunately there is no quick fix or easy solution for getting out of debt. It takes time and it takes you getting real with yourself.
In order to get real with yourself, your best option is to follow this 5 step process. Here is how to get to the real root cause of your debt:
- Step 1: Define The Problem. In this case, the problem is debt. We spend more than we should.
- Step 2: Collect Data. Here, you have to do a little detective work. How long has the problem of overspending been going on? What is the impact it has on you? What is the impact on friends and family or even your job?
- Step 3: Identify Possible Causes. In this step, you have to do a little more detective work. What events lead you to start overspending? When do you typically overspend? What other problems are present when you overspend?
- Step 4: Identify The Root Causes. Now we begin to solve the problem. You need to ask yourself why the problem exists.
- Step 5: Find Possible Solutions. Finally, you figure out ways to overcome your problem.
Let’s take a quick look at my debt problem as we run through these 5 steps to clarify things for you:
- In the first step, I defined my problem, I was overspending and in debt
- In the second step, I looked back to see when my overspending started (sophomore year of college) and the impact it had on me and my relationships (a bad impact as I started to withdraw and be irritable).
- In the third step, I figured out what led me to overspend (getting a serious girlfriend and not being able to find a job after graduation).
- In the fourth step, I identified the root causes. (I had low self-esteem, which made me think I needed to “buy the love” of my girlfriend and I was depressed when I couldn’t find a job. In both cases, buying things made me feel worthy).
- In the fifth step, I addressed my low self-esteem and depression. (I read books on how to love myself and I began seeing a therapist).
As I mentioned earlier, before I followed this action plan, I would buy things which gave me a temporary high and made me feel good. But that high wore off and I had to buy more things. Unfortunately, the high kept wearing off faster and faster, leading to more and more debt.
Had I not sat down and figured out the real reason for my debt, who knows how much debt I would have ended up with.
Solutions To Getting Out Of Debt
So we have gone through and admitted we are in debt and figured out how to get to the root issue of why we are in debt. Now it is time to start looking at the possible solutions to help us get out of debt.
Before we start talking about this, I need to make two points that are critical to remember:
First, remember you didn’t get into debt overnight. Thinking you will get out of debt overnight is foolish. It won’t happen. It took me over a year to get out of debt. I know you want out of debt in 5 minutes, but it’s not realistic. When you see or hear of a way (many times in the form of late night TV ads) of getting out of debt quickly, it won’t work. They are just tapping into your emotions. You will most likely end up in a worse situation if you try to get out of debt quickly. Don’t fall for this trap!
Second, you most likely will fail at first. This doesn’t mean you should give up, but rather it just means you didn’t get to the root issue and you need to go through the process I laid out above again. Don’t feel guilty or ashamed for failing. I failed 3 times. Most everyone else fails at trying to get out of debt the first time too. The key is to keep pushing forward and getting to the root cause of your debt.
Solution #1: Try To Get Out Of Debt Yourself
Too often we seek outside help for our issues. While in some cases this is what is needed, I encourage you to try to get out of debt on your own at first. The reason is simple. You will learn a lot about your finances (which will help you tremendously down the line) and you will be empowered by your accomplishments.
Think back to when you did something you didn’t think was possible. How did you feel? Pretty awesome right? The same thing is true here. You getting out of debt yourself will make you feel better than hitting the lottery. So I encourage you to try to do it on your own first.
What are your steps for getting out of debt yourself?
First, you have to take the time to set up a budget. I know, the dreaded B-word. But don’t look at a budget as something that is restricting you from spending money but instead as a tool to help you reach your financial goals.
By understanding how much money you have coming in, going out, and where it is going, you can better handle your money so that you can put as much as you can towards paying off your debt.
If you don’t know where to start when making a budget, I have 5 options for you to check out and try:
- Learn To Budget: if you’ve never made a budget before, read this post. It will walk you through the basics so you have a general idea of what is going on and what the goal of budgeting is. Remember, it isn’t to restrict you now, it is to step you up to a better financial life going forward.
- Excel Spreadsheets: if you are an excel nerd like me and like a 100% manual approach, then this is the option for you. In this post, you can find a handful of free templates to try. There are also some excel based automated options to make it less time consuming.
- You Need A Budget: this is an automated option for budgeting. It’s an amazing piece of software that is a must if you are serious about budgeting. It isn’t free, but is worth the money. You can see it in action here. Many users of YNAB swear by it.
- Clarity Money: not only will this app help you to budget, but it will also help you to free up some money by analyzing your expenses and helping you to cancel subscriptions and other recurring expenses. You can get it free by clicking here.
- Personal Capital: this option is a hybrid budget. You can set a couple of categories to track and open your eyes to where you money is going. Best of all, it is free.
Once you have a budget set up, it is time to start with a debt payoff plan. I have written a detailed post on how to pay off your debt using the snowball method which is the preferred method.
That post will walk you through every step of the process for paying off your debt yourself. For those of you thinking of earning more money to get out of debt, understand that you still need to go through the process of getting to the root issue. If you don’t, all that extra work you took on will be a waste.
While not required, earning more income can help you to rid your debt faster. You can read about various ways to make some additional income here.
Two Tricks To Stay On Track
While paying off your debt, you will encounter some setbacks and be tempted to pause your goal. Here are two tricks to help push you through these times:
- Find an accountability partner. This can be a trusted friend or family member. Explain to them that you are in debt and your process for paying it off. This works wonders because they will ask you about your progress which helps to keep you on track. It also motivates you to pay off your debt because you will want to share the exciting news with them about your progress.
- Set mini-goals. Paying off a large amount of debt can be overwhelming. When I was paying off my $10,000 of debt, making a $150 payment felt as though I was making zero progress. So instead of focusing on the entire $10,000 I focused on a smaller number. My goal was to pay off $1,000. Every $1,000 I paid off, I celebrated. By focusing on a smaller number, it helped me to stay motivated during the entire process.
Solution #2: Do It Yourself, With Some Help
Let’s say you want to pay off your debt yourself, but you need a little hand holding along the way. What are your options here? The best one I have found is an app called Pay Off Debt.
You will have to still work through the root cause of why you are in debt, but the Pay Off Debt app will take over from there.
It will organize your debt for you and determine what payoff method is best for you to get out of debt. You will also be able to track your goals and use the app as motivation to keep going on your journey to becoming debt free.
You can download the app here. It is a one-time price of $4.99 and is worth every penny.
Solution #3: Get Some Help By Consolidating
For some of you, you might be in the situation where your monthly debt payments are more than you can pay each month. In this case, you can still mainly work to get out of debt yourself, but you need a way to make the payments more affordable.
I’ve found three options here:
- Negotiate With Your Creditors
- Peer-To-Peer Loans
- Debt Consolidation Firm
Calling up and negotiating with your creditors can work, it just isn’t effective 100% of the time. This is because there is no incentive for you to follow through and pay down your debt. But it can still work, so it is worth a shot. Start off by trying to get late charges waived or your interest rate lowered.
When you go the peer-to-peer lending route, you are getting a personal loan funded by others. When they fund your loan, the company you go through (either Prosper or Lending Club) gives you the money. You then make monthly payments to the company and they disburse it to the people who funded your loan. In a nutshell, it is a way to get a loan and bypass the bank.
With a debt consolidation firm, things get a little dicey. There are a lot of bad debt consolidation companies out there preying on consumers. Many run the late night infomercials I was talking about earlier in this post.
Fortunately, there are a few good ones out there. To know when you have found a good one, you need to ask questions. The good ones won’t make any promises or guarantees. They also won’t make the process so complicated you don’t understand it. In fact, if they can’t explain the process in a way that makes sense to you, you should leave. Immediately.
You can use the calculator below to see how much money you could save by consolidating your debt.
I know up until this point when talking about debt I’ve been speaking of credit card debt. But the same approach applies to student loan debt as well. In fact, getting help with your student loan debt is a lot more straight forward.
I recommend you look at Lendedu. You can input your student loan information and they will give you a list of lenders you can refinance with along with how much you can save. The service is completely free to use and you are not obligated to refinance. You can check them out here.
Solution #4: Get Help
In the case that you are completely overwhelmed by your debt, there is help for you. It is called credit counseling. Again, as with personal loans noted above, there are some slimy cats in this industry. I’ll talk about how to avoid these guys shortly.
But for now, going with a credit counselor helps you out by walking you through all of the steps I highlighted in solution #1. This doesn’t mean they will do all of the work for you and your life will be a breeze. You still need to manage your finances and make sure you are paying your bills on time.
But, they will sit down and work with you to determine your budget and help you set one up, as well as look over your debt and help you create a plan of attack. In addition to this, many will help with the following:
- Negotiation on your behalf. The credit counselor will negotiate with your creditors on your behalf so that you can stop making further payments to your creditors. As soon as the counselor attempts to speak to your creditors, they will ask you not to make further payments to the company as the credit counselor will do all the negotiations on your behalf.
- Attempt to lower the interest rates. Since most credit cards have outrageously high interest rates, it is important for the credit counselor to lower the interest rates on your credit card accounts. The creditors will speak with the credit counselor and then lower the rates on your accounts so that it becomes easier for you to repay your debt.
- Single monthly payments. After you enter into a debt consolidation program, you have the option to just have a single monthly payment on your debt. You will make the single payment and the counselor will use that money to pay back your debt each month.
- Waives off late fees. If you had accumulated late fees and penalties due to mismanagement of your debt accounts, you can eliminate all of them through a debt consolidation program. The creditors will waive off such fees and thereby lower the amount you owe by a little bit.
Now, how to avoid the bad guys. Your first step is to visit the National Foundation for Credit Counseling website. Here you can connect with a counselor that is there to really help you and not help themselves.
If you would rather seek your own counselor, look for a few things before proceeding with them. Seek out a certified debt counselor that will clearly explain their services and fee structure up front, so that you have no surprises down the road. Also, make sure that they can help you with the kind of debt you have, and have experience with similar situations.
If they ask for money upfront, that is a sign you need to leave immediately. Most legitimate counselors will offer you a free initial meeting to see if there is a fit and then charge you going forward when you go over your finances together and create a repayment plan.
Solution #5: Bankruptcy
Your last option is bankruptcy. Before you settle for this option though, please make sure you try the other four options first. Declaring bankruptcy is a big deal and it will have a huge impact on your financial life now and in the years to come. So it truly is a last ditch option.
For example, when you declare bankruptcy, it is going to be hard to get a loan for a house or a car, or even for education for the next few years. This is true even when applying for a credit card. In most cases, you won’t be extended credit for many years and if you are, you will be paying a sky-high interest rate.
If you do decide that bankruptcy is an option for you, there are 2 main types:
- Chapter 7. This is mainly known a “liquidation bankruptcy” because you will have to sell some of your assets to pay down your debt first and the rest of your debt will be written off. The first step in the process is to complete and pass a means test where your income and expenses will be looked over and verified by a court.
- Chapter 13. In this process, you won’t have to sell any assets. Instead, the court will organize your debt and set you up with a payment plan to pay back your debt over time.
On the surface bankruptcy might not seem so bad. But know these facts before jumping in:
- Not all debts will be discharged. Back taxes, child support, alimony, student loans and fines and restitution will not be honored in bankruptcy. This means you will still have to pay these debts off yourself. Bankruptcy will not remove them for you.
- Filing is public. This means it is public information that you declared bankruptcy and anyone, at any time can look this information up.
- It won’t solve the problem. If you think you can skip out on figuring out why you are in debt and just file for bankruptcy, you are setting yourself up for a bad future. This is because you will just continue with the debt cycle I talked about before.
If you do decide on moving forward with bankruptcy, you have to find a good bankruptcy attorney. As with debt consolidation, a good place to start is with the NFCC.
I realize this is a lot of information here, but getting out of debt and staying out of debt is big deal. You want to make sure you take the time to do it right so you can become debt free and stay that way.
I’ve laid out the plan for how to get out of debt here for you. It’s now up to you to implement it and take control of your spending. So take your time when reading through the various solutions I listed and really work to figure out which one makes the most sense for you. You should be able to easily disregard a couple of them based on your personal situation.
From there, look at the pros and cons of each and then think about yourself and what you would need to get out of debt. Do you think you need or want someone to hold your hand or do you think you would be able to do it on your own? Answering this question will help guide you in the right direction.
You can do this. I believe in you and I am certain that members of your support group believe in you as well. It’s just a matter of you believing in yourself and starting to take action. If you need help along the way, or an outlet to vent, feel free to email me. I’ll try to give you some advice or just lend an ear.
Remember, you didn’t get into debt overnight and you won’t get out of debt overnight. But you can get out of debt. I am proof of this as are countless others. I leave with this thought:
What is your ultimate goal? For me it is to be financially independent. I can’t be financially independent if I am living beyond my means and spending money I don’t have. I also can’t be financially independent if I am carrying mountains of debt. If your goal is to be financially free, then here is your chance to start taking steps towards that goal. You can do this.
And if you need further motivation, watch this video: