How to Get Out of Debt 101: 7 Effective Strategies

How to Get Out of Debt: 7 Effective Strategies

Debt can be overwhelming to figure out how to start paying it off. But worry not. In this article, I’ll give you seven effective strategies on how to get out of debt and how to stay on track so you can live debt-free.

As someone who has successfully paid off a debt, I can attest that it’s not an easy journey, but it’s definitely worth it in the end. By following the strategies and tips discussed in this article, you can become debt-free and enjoy the peace of mind that comes with financial freedom.

Table of Contents

What is Debt?

Debt is money borrowed from a lender that must be repaid with interest. But, not all types of debt are created equal. There are different types of debt: good debt and bad debt.

  • Good debt is an investment that creates value, such as student loans, home mortgages, and business loans.
  • Bad debt is when you use credit cards to purchase disposable items or durable goods and don’t pay off the balance in full.

Debt can affect your credit score and financial stability, so it’s essential to manage it responsibly.

Step-by-Step Guide on How to Get Out of Debt Fast

If you’re struggling with debt, this step-by-step guide on how to get out of debt fast is for you.

  1. Understand your debt: Make a list of all your debts, including the amount owed, interest rates, and minimum payments. This will help you prioritize which debts to pay off first.
  2. Pick a debt repayment strategy: Strategies include the Debt Snowball Method, Debt Avalanche Method, and 50/30/20 rule. Compare offers and fees for debt consolidation or balance transfer.
  3. Stick to a budget: Use the 50/30/20 rule to allocate your income to necessities, discretionary spending, and savings/debt repayment. Sync credit cards with budgeting apps to track your spending habits.
  4. Cut expenses: Refer to the strategies on how to cut expenses
  5. Take on side hustles: Refer to examples of side hustles that you can take
  6. Seek professional help if needed: Financial advisors or credit counselors can help you create a debt repayment plan and provide guidance on managing your finances. For example, a financial advisor can help you invest in stocks or mutual funds to grow your wealth, while a credit counselor can help you negotiate with creditors to reduce your interest rates or monthly payments.

7 Strategies for Paying Debt

As someone who has successfully paid off a massive debt, I can attest that it’s not an easy feat, but it’s definitely doable. Here are some tips on how to get out of debt that worked for me and can work for you too:

  1. Budgeting
  2. Debt Consolidation
  3. Balance Transfer
  4. Debt Snowball Method
  5. Debt Avalanche Method
  6. Side Hustles
  7. Cutting Expenses

1. Budgeting

Budgeting is an essential part of debt repayment. One popular budgeting method is the 50/30/20 rule, which allocates 50% of your income to necessities, 30% to discretionary spending, and 20% to savings and debt repayment.

a. 50/30/20 Rule

Let’s say you earn ₱50,000 per month after taxes. Using the 50/30/20 rule, you would allocate ₱25,000 (50%) to necessities like rent, utilities, groceries, and transportation.

You would allocate ₱15,000 (30%) to discretionary spending like dining out, entertainment, and shopping.

And finally, allocate ₱10,000 (20%) to savings and debt repayment. This ₱10,000 can be used to pay off debts like credit cards, personal loans, or car loans.

b. Envelope System

Another budgeting method is the envelope system, where you allocate cash into envelopes for different categories like groceries, transportation, and entertainment.

Once the cash in the envelope is gone, you can’t spend any more money in that category.

Regardless of the budgeting method you choose, the key is to track your expenses and stick to your budget. By doing so, you can free up money to pay off your debts faster and achieve financial stability.

2. Debt Consolidation

Debt consolidation is one of the best ways to get out of debt faster. It’s a debt repayment strategy that involves taking out a new loan to pay off multiple debts. The new loan typically has a lower interest rate, making it easier to manage and pay off debts.

For example, if you have multiple credit card debts with high interest rates, you can take out a debt consolidation loan with a lower interest rate to pay off those debts. This can simplify the repayment process and potentially save you money on interest payments.

However, it’s important to evaluate your financial situation, compare offers from different lenders, and consider the fees involved before deciding to consolidate your debts.

3. Balance Transfer

Balance transfer is a debt repayment strategy that involves transferring high-interest credit card debt to a new credit card with a lower interest rate. This can help you save money on interest charges and pay off the debt quickly.

NOTE: You should thoroughly compare offers from different balance transfer credit card companies, consider the fees involved, and read the fine print before deciding to transfer your balance.

For example, some credit card companies may charge a balance transfer fee of 3% to 5% of the transferred amount. Additionally, you may lose the introductory interest rate if you miss a payment or exceed the credit limit.

4. Debt Snowball Method

The Debt Snowball Method is a debt repayment strategy that involves paying off your smallest debts first while still making payments on other debts.

Once the smallest debt is paid off, you can then allocate the money you were using to pay off that debt to the next smallest debt.

This method creates a snowball effect, where the momentum of paying off debts builds on each other and accelerates. Here’s an example of how the Debt Snowball Method works:

  1. List all your debts, except for your mortgage, from smallest to largest balance.
  2. Make the minimum payments on all your debts except the smallest one.
  3. Put as much money as you can toward paying off the smallest debt.
  4. Once the smallest debt is paid off, take the money you were using to pay off that debt and allocate it to the next smallest debt.
  5. Repeat the process until all your debts are paid off.

Example

Let’s say you have three existing debts:

  • a credit card with a debt balance of ₱10,000
  • a personal loan with a balance of ₱20,000 and
  • a car loan with a balance of ₱50,000

Using the Debt Snowball Method, you would pay off the credit card first by allocating as much money as you can toward debt payments while still making minimum payments on the other two debts.

Once the credit card is paid off, you would then allocate the extra money you were using to pay off the credit card to the personal loan.

Once the personal loan is paid off, you would then allocate the money you were using to pay off the personal loan to the car loan until all your debts are paid off.

5. Debt Avalanche Method

The Debt Avalanche Method is a debt repayment strategy that involves paying off your debts with the highest interest rates first while still making minimum payments on other debts.

Once the debt with the highest interest rate is paid off, you can then allocate the money you were using to pay off that debt to the next debt with the highest interest rate.

This method can help you save money on interest charges and pay off your debts faster.

Example

Let’s say you have three debts:

  • a credit card with a balance of ₱20,000 and an interest rate of 22%
  • a personal loan with a balance of ₱50,000 and an interest rate of 15%, and
  • a car loan with a balance of ₱100,000 and an interest rate of 10%

Using the Debt Avalanche Method, you would pay off the credit card first by allocating as much money as you can toward paying off that debt while still making minimum payments on the other two debts.

Once the credit card is paid off, you would then allocate the money you were using to pay off the credit card to the personal loan, which has the next highest interest rate.

Once the personal loan is paid off, you would then allocate the money you were using to pay off the personal loan to the car loan until all your debts are paid off.

6. Side Hustles

Side hustles are a great way to increase your earnings and pay off your debts faster. Here are some examples of side hustles that you can do in the Philippines:

  1. Online Freelancing: You can offer your skills and services online, such as writing, graphic design, web development, Facebook ads, and social media management. You can find clients on freelancing platforms like Upwork, Freelancer, and Fiverr.
  2. Online Selling: You can sell products online through platforms like Lazada, Shopee, and Facebook Marketplace. You can sell items that you no longer need or create your own products to sell.
  3. Part-time Job: You can take on a part-time job in addition to your full-time job. You can work as a tutor, a barista, a cashier, or a delivery driver, among others.
  4. Renting Out Your Property: If you have a spare room or a parking space, you can rent it out on platforms like Airbnb or Parking Space PH.
  5. Starting a Business: You can start your own small business, such as a food cart, a small online store, or a service-based business like cleaning or laundry services.

By taking on a side hustle, you can earn extra income that you can use to pay off your debts faster. It may require some extra effort and time, but it can be worth it in the end.

7. Cutting Expenses

Cutting expenses is an effective way to free up money for debt repayment. Here are some examples of ways to cut expenses:

  1. Cook at Home: Eating out can be expensive, so consider cooking at home instead. You can save money by buying groceries in bulk and planning your meals in advance.

    Pro tip: I like to cook in bulk and freeze it for days to save on fuel (during cooking) and time. I just need to microwave my food and it’s ready to eat!

  2. Use Public Transportation: Owning a car can be costly, so consider using public transportation instead. You can save money on gas, maintenance, and insurance.
  3. Cancel Subscriptions: Cancel any subscription services that you don’t use or need, such as streaming services, gym memberships, or magazine subscriptions.

    Pro tip: If you can’t afford canceling a subscription, consider using an account-sharing site like Gowd. You can save a ton of money from your subscriptions

  4. Shop Smart: Look for deals and discounts when shopping for groceries, clothes, and other items. You can also buy second-hand items or borrow from friends and family.

    Pro tip: I buy groceries during Lazada’s monthly sale (e.g. 8.8, 9.9, 10.10) to avail from free shipping, cashback, and vouchers.

  5. Reduce Utility Bills: You can save money on utility bills by turning off lights and appliances when not in use, using energy-efficient bulbs, and taking shorter showers.

By cutting expenses, you can free up money that you can use to pay off your debts faster. It may require some lifestyle changes, but it can be worth it in the end.

3 Tips for Staying On-Track

Staying on track with debt repayment can be challenging, but it’s essential to achieving financial freedom. Here are some tips that helped me stay motivated and focused:

  1. Set Realistic Goals and Timelines: Break down your debt repayment plan into smaller, achievable goals and set a timeline for each one. Celebrate each milestone you reach to stay motivated.
  2. Celebrate Small Victories: Paying off debt can be a long and challenging journey, so it’s essential to celebrate small victories along the way. Treat yourself to something small when you reach a milestone, like paying off a credit card or loan.
  3. Seek Professional Help if Needed: If you’re struggling to manage your debt, consider seeking professional help. A financial advisor or credit counselor can help you create a debt repayment plan and provide guidance on managing your finances.

Staying on track with debt repayment requires discipline and commitment. But with the right strategies and mindset, you can become debt-free and achieve financial stability.

FAQ

  • What are some strategies for becoming debt-free?

    Some strategies for becoming debt-free include debt consolidation, debt management, debt settlement, balance transfer, and creating a debt repayment plan.

  • What is debt consolidation?

    Debt consolidation is the process of combining multiple debts into one single loan or balance transfer with a lower interest rate and more manageable monthly payment.

  • How does debt management work?

    Debt management involves working with a credit counseling agency to create a budget and repayment plan, negotiate with creditors for lower interest rates or waived fees, and make monthly payments to the agency, which then distributes the funds to creditors.

  • What is debt settlement?

    Debt settlement is a negotiation process where you or a professional debt settlement company negotiates with creditors to settle your debts for a lower amount than what you owe. However, this option can negatively impact your credit score.

  • What is a balance transfer?

    A balance transfer allows you to move your credit card balance(s) from one card to another, usually with a lower interest rate. This can help you save money on interest and pay down your debt faster.

  • How does a debt management plan help you get out of debt?

    A debt management plan helps you get out of debt by providing a structured repayment plan, negotiating lower interest rates, and ensuring that you make consistent payments toward your debt each month.

  • How can I pay off my debt faster?

    You can pay off your debt faster by paying more than the minimum payment, using a debt consolidation loan to lower interest rates, or exploring debt settlement options.

  • How can I lower my interest rate?

    You can lower your interest rate by negotiating with your creditors, transferring your credit card balance to a card with a lower interest rate, or seeking a debt consolidation loan with a lower interest rate.

  • Will getting out of debt hurt my credit?

    Getting out of debt typically does not hurt your credit report, but it may temporarily lower your credit score due to factors such as closing accounts or a decrease in available credit.

  • How can I stay out of debt once I’m debt-free?

    You can stay out of debt by creating a budget, avoiding unnecessary spending, saving for emergencies, and only using credit cards if you can pay off the balance in full each month.

Final Thoughts

Getting out of debt requires discipline, commitment, and a solid plan. By understanding debt, using strategies like the Debt Snowball Method and the Debt Avalanche Method, you can take control of your finances and achieve financial stability.

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