The average household debt in America is $137,063.
Here are the best next steps for reducing debt and ultimately becoming free.
1. Create a Budget
Most people don't know how much money they bring in each month, and they don't know how much money is going out each month. They spend money using credit cards and keep charging until they are maxed out, get another one, and keep going.
A budget is an absolute necessity if you are serious about making progress. A budget doesn't necessarily mean restriction – it can mean freedom.
When you know what you have available to spend, you can make sure you're spending it on things that are important to you. Without a budget, it's easy to buy things spur-of-the-moment, which one might later regret.
2. Know How Much Debt You Have
To start making progress with your debt repayment, you'll need to see how much debt you have. Most people must keep paying their mortgage and focus on paying down credit card debt, car debt, and other types of debt – so having all these numbers easily accessible will help you understand where you stand as you pay down your debts.
Even if there are debts that you would consider small, you must list them. A paper list works great, or you can put your numbers in a program like Excel so that you can manipulate them easily.
Ultimately, many people don't have as much debt as they think they do, and doing the math can provide some hope. Even if you have as much debt or more debt than you thought you had, you'll be able to know what you're dealing with, which is a critical step.
3. Cut Spending
People wince at the thought of cutting spending, but when you keep in mind that it isn't forever, you can get yourself on the right track. You can't pay down debt if you're still using debt to buy things. You must redirect a portion of your current spending towards debt payments if you are serious about effectively paying down debt.
Reducing how often you spend money is essential if you want to start seeing results with your debt repayment plan.
4. Say No to Credit Cards
Credit cards will suck the wind out of your sails every time.
The high variable interest rates, late payment fees, and high charges for cash advances can set you back by just using it a few months.
Having credit cards can help you build your credit, but you should make it very difficult for you to use them. Some people recommend that you go so far as to literally put your credit cards in water and freeze them. Setting aside the great symbolism here, this forces you to weigh the pros and cons before trying to unfreeze them.
5. Take on a Second Job or Side Hustle
Once you've cut spending as much as you can, it's time to start bringing more money into the household.
Getting a second job or having a side hustle can be just what you need to boost your income to the next level.
6. Focus on Reducing Debt Carrying the Highest Interest Rate
When you're trying to figure out which debt to pay down first, you should focus on debt that has the highest interest rate.
When you pay down high-interest-rate debt first, you can save hundreds or even thousands of dollars.
The higher the interest rate is on the debt you're paying on, the more money you save, the sooner you pay it off.
7. Consider Debt Consolidation
If you feel like you're drowning in debt and you can't remember who you have to pay and when then you might want to consider debt consolidation.
Debt consolidation doesn't save you money in most cases, but it can make your debt feel much more manageable.
8. Use a Debt Snowball
Using the debt snowball method is one of the best ways to get rid of debt.
With the debt snowball, you'll pay the minimum payment on all of your accounts, but when the lowest debt is paid off, you'll put that minimum payment toward the next debt.
You can also use any extra money you have to pay off the smallest debt, then proceed to the next lowest. Repeat until all of your debts are gone.
9. Don't Beat Yourself Up When You Get Off Track
Something is bound to come up that is going to push you off the path a little bit. You might have a medical emergency that is more than what you prepared for or an unexpected home or car repair.
The important thing is that you get back on track and stick to the plan you created as closely as possible.
Now You Know How to Become Debt Free
Now that you know exactly how to become debt-free (and fast), you can work your way toward the freedom you've always wanted.
When you use the above tips, you'll be well on your way to achieving your goals.
To learn more about debt and options you have for getting out of it, check out our article on the consequences of bankruptcy.