What’s the Fastest Way to Get Out of Debt?

“A man in debt is so far a slave.” Ralph Waldo Emerson penned this statement in his 1860’s book The Conduct of Life. Over the last 5,000 years, debt has been a bain of human existence. In today’s fast-paced and electronic world, it often seems that we cannot move forward without utilization of our age-old nemesis; debt. According to Nerdwallet, the average U.S. household with debt carries $6,591 in credit card debt and $138,722 in total debt. For many, debt contributes to individual psychological stress and depression. We have all agreed that it’s terrible, but what is the fastest way to get out of debt?

When I started writing this post I Googled ‘how to get out of debt’ I discovered 38,200,000 results. Many of the articles I’ve read have been written with such ambiguity and vagueness that they were useless. And some the advice given borders on lunacy. So as a professional financial advisor, I am going to give you, for free, the list that I give all my (paying) clients.

The Fastest Way to Get Out of Debt in 5 Steps:

Step #1: Take a detailed, comprehensive inventory of all of your debts.

The beginning point in most activates begins with a current assessment. Debt management is not an exception. An easy way to gain a comprehensive list of your outstanding obligation is to pull your credit report. Experian, Equifax, and TransUnion are the three major credit reporting companies. Most, but maybe not all, of your debts, should be reflected on these company’s reports. Personal loans, medical loans, or business loans, may not be reflected on your credit report.

Once you have a detailed list of your debts, you will want to write each of the debts down. In my practice, I use software like Excel for recording the obligations of clients. In this software, I can build a column for Balance, Monthly Payment, Interest rate, and Payment Date. I can also separate the monthly payment amount into principle and interest amounts. All of these items will be substantial in the next steps.

Step #2: Construct and analyze your monthly budget.

The word budget is often viewed as negative. My business partner even refused to use the word. Whatever term you wish to use, you will need to identify with great specificity your monthly income and monthly expenses. This requires painful work. Many of us do not fully understand how much money we make and where we spend our money. When we construct a budget, we gain much insight into our lives.

In a debt reduction plan, the goal is to build the budget in such a way that we are operating our lives with great specificity. Barebones budgeting, shoestring budgeting, and minimalist budgeting are all terms that are used to describe the type of budget you need here. The primary goal is to determine how much extra monthly income you have at your disposal to attack your debt.

Step #3: Devise a payment plan.

Now that you have identified your extra money from your monthly income which you can apply to the debt, it is time to develop a payment plan. There are many methods that have proven tried and true. You may be able to select one of these methods, or you may feel like you can apply a combination of these methods to reach your goals. Whatever the choice, device and plan and implement! Here are a few suggestions:

1. Debt Snowball Plan – Dave Ramsey has made this method popular in recent days, though this is not a new method. Find the debt with the lowest payment and pour as much money as possible toward this debt. You would continue paying a minimum on all of your other debts. Once you pay the first debt, simply make extra payments to the next lowest debt balance. Repeat the process and you will “snowball” your debts. This is perhaps my favorite method.
2. Debt Avalanche Plan – This is similar to the Debt Snowball, but you would attack the highest interest account first, the 2^nd highest second, etc. I’ve have found that many analytical people prefer this method over the debt snowball.
3. If you have a substantial amount of credit card debt, you may want to consider a balance transfer to a 0% APR credit card. Some cards will even provide you with a 12-24-month interest-free time frame. I would caution about opening another credit card. There is a reason for your debt, and the last thing you may need is another avenue for digging your hole deeper.
4. Debt consolidation is another method of debt elimination. Student loans, for example, maybe eligible for refinancing, and this may place you in a better position. Companies like SoFi or LendEDU are a good place to start.

Step #4: Look at other opportunities

Now that you have your debt reduction plan in place, you will want to find creative ways to generate additional money to apply to your debt. Here are a few suggestions:

• Get a second job. I have many clients and friends who have picked up some part-time work, a side job, or even asked for an increase in hours to generate additional income.
• Sell everything. This is often a hard step for us. However, if we want to knock out our debt, we need to look at items which we have acquired that we don’t ‘NEED’.
• Start a business to sell a creation. My daughter loves to custom package and sell her eggs. She purchased some chicks and now they are providing her eggs. She has done quite well making some extra money for her goals.

Step #5: Place your dreams in writing.

Why are you working so hard to get out of debt? Is it freedom? Reduced stress? Additional monthly funds? To me, there is nothing more motivating than to place my objective in writing and then constantly remind myself of the goal. I’ve been guilty of putting index card all over the house, in the car, and even inside the fridge (hey, I’m there a lot). These constant reminders help me stay on track.

Debt can seem overwhelming, yet following these steps can help you eliminate the debt in a systematic and time efficient manner.