Debt is a significant source of stress for many Americans. In fact, 73% percent of people recently surveyed by CreditWise said finances were a major stressor in their lives. With the average American having a debt total of $92,727 in 2020, it’s no surprise that debt seems inevitable. But it doesn’t have to be that way. It is possible to learn how to be debt-free. Here we provide you with some easy, actionable steps to take to help begin your journey to becoming debt free.
1. Budget
A study by The Balance found that 86% of people surveyed use some sort of budget. This number may be slightly higher than usual since one-third of the respondents began making a budget during the pandemic.
Budgeting not only helps when money is tight, but it can also be a great tool to become debt-free and, most importantly, stay that way. With a budget, you can figure out how to cover your basic expenses, pay down your debt and pay for any extras, like entertainment.
If you have never created a budget before, there are different methods to see what works best for you, notably the 50/20/30 Rule and a Zero-Based Budget. Regardless of which method you choose, a budget gives you the knowledge to know where your money is going.
Once you create a budget, you will be able to determine your next steps to becoming debt-free. For example, if you already have money leftover at the end of the month, this surplus can then be applied to pay down your debt faster. If you are in the red after subtracting your expenses from your income, try to balance your budget by figuring out how to earn more income or reduce your costs. Follow these steps to further your progress, and in the next section, we’ll give you a few ideas about how to be debt-free.
2. Make a Debt-Free Plan
Repaying debt can take some time, depending on your debt total. To stay motivated, it helps to pick a debt-paying strategy that works for you. Two options include the debt avalanche method and the debt snowball method.
The debt avalanche method focuses on paying debts with the highest interest rate first, although these could be the most significant balances and take years to pay off. This method is best for those focused on saving as much as possible on interest costs, even if gratification takes time.
The debt snowball method focuses on paying the smallest debt balance first and knocking out each balance from smallest to largest. This strategy is best for someone motivated by instant gratification because you’ll enjoy the success of paying off individual loans faster, even if you may pay more in interest over time.
Whatever method motivates you more is the best for you. To create your debt-free plan, gather all your debt balances and interest rates. Once you know which method you will follow, you can see how you will achieve the goal of becoming debt-free.
3. Earn More Money
The path to becoming debt-free will not always be easy, but it will be worth it. Earning more money may not seem easy, but you can get creative to increase your income if need be. Try asking for a raise, increasing your hours at work, taking on a side hustle, selling items from around your house, babysitting or pet sitting, or working as a rideshare or delivery service driver. Any extra income that you can put towards debt can help you be debt-free faster and help you save on interest costs.
4. Reduce Expenses
Reducing your expenses and putting extra money toward your debts can help to speed the repayment process. To start, look at any credit card bills or track your expenses for a week to see where your money is going. Then see what costs can be eliminated or reduced. From reducing the number of streaming services you use to eating out fewer times each week, you can find several options to reduce your monthly expenses. Although these may be small monthly expenses, they can add up to significant savings when becoming debt-free.
5. Refinance Student Loans
If you are ready to kick your debt to the curb, refinancing your student loans can be a helpful step in becoming debt free. During this process, you’ll work with a new lender to pay off your old student loans, and then you’ll receive a new loan with updated terms. Often, you can reduce your interest rate or change your repayment term when refinancing and aim to become debt free faster.
6. Use Cash for Accountability
If using your credit card causes you to overspend, try paying with cash for your purchases. Once the money is gone, you won’t have anything else to spend (as long as you don’t reach for your card!). Plus, physically handing money over may make you think twice before making an unnecessary purchase. Using cash can also ensure that you do not add to your debt total if credit card debt is an issue for you.
7. Use Extra Money Wisely
If you receive unexpected money, for example, a bonus at work, raise, tax refund, rebates, or credit card cash rewards, you can use it to pay down debt, as well. Extra payments can significantly impact your loan repayment process and help you save on interest costs.
8. Track Progress
Becoming debt-free may take time, but tracking your progress can help keep you motivated! You can track your progress by writing down your loan balances every month to see them reducing or visually see progress by coloring in a graph each month with how much you have paid. Find a tracking method that motivates you so you can see how far you have come.
Bottom Line
Debt does not have to be a stressor that is always with you. By taking these steps, you can determine how to become debt-free and finally kick debt to the curb.
