Getting out of debt can seem like an uphill battle with no end. Mounting debt can cause embarrassment, worry and years of stress. With bankruptcy filings on the rise, more Americans are looking for ways to get out of debt. You can eliminate debt if you are willing to undergo an honest and complete financial makeover. By approaching debt mathematically rather than emotionally, you can develop a system to pay off bills and remove the weight from your shoulders without ruining your credit score.
Step 1
Watch your spending. Before you can make a plan to eliminate debt, you must become aware of how much money you spend on discretionary purchases. Keep a log of every penny you spend for one to two weeks. Be sure to account for all expenditures outside of normal household bills. Track everything from your morning coffee to gas and groceries. Your spending log should not include regular monthly expenses, such as your mortgage, your car payment or your utility bills. Analyze the log to find ways to cut back. Any money you save can be applied toward your debt.
Step 2
Adjust income. Gather all your pay stubs and income information for the last six months. Look over your statements to see how much money you actually make. Pay close attention to your tax withholdings. If you normally receive large refunds from the Internal Revenue Service (IRS), odds are you are paying in too much throughout the year. Adjust your withholdings to increase your paycheck and free up more money to pay off bills. If you simply do not make enough money, consider a weekend job to boost income.
Step 3
Modify bills. Compile information on all your monthly bills and outstanding debts. Look for ways to cut back, such as downgrading your cell phone or cable plan. Call creditors to negotiate lower interest rates on credit cards and consider refinancing high rate loans if possible. The money you save should be applied toward paying off debt.
Step 4
Rank debts. Make a list of all your debts. Bills should be ranked, according to their interest rates. Debts with the highest rates should be listed first and should descend to the lowest rates, regardless of balance. List the minimum monthly payments and current balances owed for each debt.
Step 5
Pay off your debt. Pay the minimum monthly payments on all your bills except for the one at the top of the ranking list. This bill is the one with the highest interest rate and needs to be paid off first. Pay as much as you can toward this one debt. Money you saved by cutting spending, adjusting income and modifying bills should be applied to this debt. When it is completely paid off, apply the same amount of money you paid on it to the next one on the list. Pay that amount plus the minimum payment you were already paying on the second bill, creating a snowball effect. Continue this pattern until you are debt free.
Tips and Warnings
- If you are still unable to payoff your bills, consult a debt management firm for help. Firms can negotiate lower interest rates and set up a structured payment plan for you.
- As you begin to pay your bills off, do not start spending the extra money. Apply the additional funds toward other debts or start saving, if possible.
Things You'll Need
- Pay stubs
- Bill statements
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