Debt is a slippery slope.
It starts off small, and before you know it, it's taken over every aspect of your life. And this can have multiple negative implications – to say the least.
Your credit score, mental health, personal relationships, and personal finances can take a significant blow when debt gets out of hand.
But not all hope is lost – there are ways to get out of it.
It may take some time, but each step is a crucial part of the personal-finance puzzle to get to the bigger picture: financial happiness and stability.
Step 1: Getting Your Budget in Order.
First things first – get your budget in order.
Start with your income after taxes. How much do you make per month?
Then, list out all your monthly expenses. Everything.
The biggest mistake people make when they make their budget is to just focus on the bills they have to pay – in reality, there's a lot more that has to go into it.
For example, make sure to include your expenses for:
- Mortgage/rent
- Groceries
- Gas or public transportation/parking fees
- Vehicle maintenance
- Vehicle payments
- Utilities
- Insurance
- Cell phone and landlines
- Internet, cable, streaming services, and other memberships
- Personal hygiene, including beauty products and haircuts.
- Restaurants and entertainment
- Clothing and shoes
- Pet expenses
- Savings including retirement fund.
- Credit card, line of credit, and student loan payments, etc.
If the sum of your expenses is more than your total income…you're in trouble.
But if you have some money left over after subtracting all your expenses, you can focus on putting that money into paying off your debts.
And if you really want to get real about your debt, cutting back on expenses where you can, is the best way to save more money.
Step 2: Priorities – What Comes First.
Now that you have your budget in order and a bit of wiggle room with your expenses to income ratio, it's time to figure out what debt to tackle first.
A good rule of thumb is figuring out what debt you have that has the highest interest rates – that's the debt you'll want to overcome first since that's what will cost you the most interest in the long run.
Here's a look at some of the most common interest rates:
| Type of loan | Average interest rate |
| Mortgage | 2.89% for a 5-year term |
| Line of credit | 3% to 5% |
| Car payment | 4.9% |
| Student loans | 5.05% for undergraduate loans |
| Credit card | 19.24% |
Based on these numbers, credit card debt should be the first thing on your list of loans to pay off.
This brings us to our next step…
Step 3: Balance Transfer Credit Cards
If you're having a hard time getting your credit card debt in order, there are options for you.
Balance transfer credit cards are a great tool to help lower your interest payments for a set period.
For example, a credit card could offer you 0% interest for 10 months when you transfer an existing credit card balance over to the new balance transfer credit card.
Some even offer lower-than-usual interest rates after the balance transfer period is over.
But keep in mind, balance transfer credit cards are best used to lower debt, not to make purchases.
Although paying with a debit card can leave some rewards on the table, if you're struggling with credit card debt, it's best to stay away from credit until the balance is paid in full.
Step 4: Debt Consolidation?
If you're completely overwhelmed, perhaps debt consolidation could be an option for you – but it's not for everyone.
There's a lot of things to consider when thinking about debt consolidation, like potentially putting your house or another large asset on the line.
And there are many different kinds of consolidation, such as a:
- Debt consolidation loan,
- Home equity loan,
- Line of credit, or
- Debt management program.
Keep in mind that consolidating your debt might make it more manageable, but it doesn't address one of the biggest root causes for debt: overspending.
Step 5: Stay Out of Debt Forever.
Once your debt has been K.O.-ed, it's time to stay out of it – forever.
Responsible spending by following and updating your budget as your spending and income changes is the biggest takeaway.
Borrowed money should never be treated as extra income – it will come back and bite you.
And though repaying debt takes time, it's worth it in the end.