Tips and tricks to get rid of your debt in a year
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BLUEPRINT
Updated 8:07 a.m. UTC Nov. 13, 2023
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The average American has nearly $102,000 in debt according to data from Experian. If you have a large debt balance, you’re not alone.
Getting out of debt can save you money, boost your credit score, set you up for success and release financial stress. Here is a list of the steps to pay off debt.
Accredited Debt Relief
How to pay off debt in a year
1. Avoid accruing more debt
The first step toward getting out of debt is to avoid getting into more debt. Don’t take out new loans unless they contribute to paying off your debt. And even then, be careful.
One trick is to only use cash so you have to physically count out the money you’re spending. When you have to use a card, such as for online purchases, use a debit card instead of a credit card.
2. Create (and keep) a budget
Create a budget that helps you track both your income and expenses. This will allow you to identify areas where you can cut back on spending and then redirect that money towards paying off your existing debt.
Budgets can be as flexible or inflexible as you’d like, but they’re tools to help you achieve your financial goals. There are budget apps that can help. Some highly rated budgeting apps include Empower, Mint and YNAB (You Need A Budget).
3. Focus on your high-interest debt first
Not all debt is equal. In fact, some debt (like consumer credit cards) can be exponentially more expensive than other types of debt (like mortgage loans) simply because of the interest rate.
It’s important to pay off the debt with the highest interest rate first. Once you’ve paid off your highest-interest debt balance, you can move on to the next highest. This strategy is called the debt avalanche method. If you’re aiming to pay off your debt ASAP, this method is faster and a better fit than the snowball strategy, which focuses on your smallest balances first.
Tip: Take a look at how much of your loan payments are going towards the interest versus the principal.
4. Cash out some savings or equity
While it’s vital to maintain an emergency savings account with three- to six-months worth of your expenses, you could use anything in excess of that to pay down debt.
If the math makes sense, you could do a cash-out refinance and use the proceeds to pay off your highest-APR debt. Secured debt, like mortgages and auto loans, almost always garners a lower interest rate than unsecured debt, like personal loans and credit card debt.
5. Consider a balance transfer card or debt consolidation loan
If you’re paying 25% APR on several thousand dollars of credit card debt, switching to a lower interest rate is smart. Consider moving your credit card debt to a 0% APR balance transfer card so you can pay no interest while paying down that debt. Another option is a debt consolidation loan, which can help you move several debts into one lower-interest loan.
This will require some discipline, however. Putting your original balances at zero can make it very tempting to keep spending, raising your balances again. This will make your situation worse because your balances are back up and you have a new loan or credit card.
6. Cut out unnecessary expenses
The more you can cut back, the more money you can put toward paying off your debt faster. Common places to cut spending include the following:
- Dining out.
- Subscriptions.
- Entertainment.
You can also look into decreasing what you pay for necessities. Clip coupons for groceries and personal items. And, before you renew anything, look into whether you could get a better deal by switching. This can apply to your internet, cable, cell phone and insurance.
7. Increase your income
Easier said than done, yes, but increasing your income can be one way to compound your debt-free efforts.
Whether this means getting a raise, a promotion, a new job or taking on a side hustle, bringing home more bacon means you can then put it towards paying off your debt.
8. Automate the process
Most of us managed to get ourselves in debt without much help. But getting out of debt isn’t just a financial process, it’s also a matter of breaking bad habits and retraining ourselves.
“One of the best strategies for managing spending and savings is to automate it,” says Taylor Tovar, CFP and CEO of The Money Couple.
“If you rely on yourself to go into the account and make the payment every month or transfer the funds into a savings account, you will quickly fall behind. Automate those transfers for the same day you get paid and you’ll quickly learn to live on less because you aren’t seeing the funds in your primary account,” Tovar says.
Most banks and lenders have free automation tools.
9. Use financial tools and apps
There are many different tools and tricks when it comes to tracking your progress and managing your efforts. Some people like a good old-fashioned spreadsheet or even a paper balance sheet, but there are plenty of apps if you prefer to go digital.
10. Call in the professionals
Sometimes a little professional help can go a long way. If you’re struggling to get out of debt, or don’t even know where to start, consider seeking help from a financial advisor or credit counselor.
“There are so many great money coaches and counselors out there with the skills and abilities to help you create a plan,” Tovar says.
The National Foundation for Credit Counseling is a nonprofit organization that can help.
Frequently asked questions (FAQs)
Debt counseling and debt settlement are very different. Debt counselors look at your specific situation and provide you with strategies for eliminating debt in a realistic way. Debt settlement, on the other hand, is a last resort before bankruptcy where you convince your creditors that you cannot repay your debt completely and have them settle for a partial payment.
One way to create a realistic budget to manage your debt is the 50/30/20 rule. This rule helps manage monthly savings by dividing them into three categories: 50% for things you need, 30% for things you want and 20% can go towards savings and debt. This will help you balance out purchases by focusing on what you need versus what you want.
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