Debt: one of the unavoidable parts of adulthood.
According to Experian, one of the three main credit reporting agencies in the United States, U.S. households owe more than $14 trillion in debt.* That means the average American owes more than $94,000 – so if you’re currently in debt, you’re not alone.**
American debt mostly comes from four sources: credit card debt, auto loans, student loans, and mortgages. A little over $9 trillion of that $14 trillion in debt can be attributed to mortgages.*** Auto loans, which have had low interest rates since 2008, contribute an additional $1.3 trillion.****
While it’s all too easy to get into debt, climbing your way out of debt takes organization, discipline, and careful consideration. Here are 10 ways you can start living debt-free.
1: Organize Your Debt and Bills
The first thing you’ll have to do is figure out just how much you owe, and to whom you owe it. You can’t pay it off if you don’t know what you owe. And if you have fallen behind in paying a bill, the company may have sold the debt to a debt collector. While it’s possible they might be calling you already, they may not have figured out how to contact you yet, so it may be up to you.
There are a couple ways you can straighten out how much you owe and who to pay. First, get your paper bills all together and make a list of the balances.
Second, find out what your credit report says. You can get a free copy of your credit report once a year by visiting annualcreditreport.com. Not all of your debt may be on your credit reports, according to Experian. If your debts are older than 10 years, they may have fallen off your credit report. In that case, you’ll have to reach out to creditors directly.
The next step of organizing your debts is to prioritize them based on which ones you need to pay off first.
2: Live Within Your Means
Living within your means is harder than it sounds. It means to not spend more money than you make. It also means not putting more debt on a credit card. There are a lot of things you can do to help yourself live within your means. You can eat at home instead of eating out, buy clothes second hand instead of shopping at the mall, and learn to repair your possessions instead of buying new ones. If you don’t have the cash for what you want, you can put it on a wishlist and save it for later.
One important way to start living within your means is to make a budget.
3: Make a Budget
A budget is a list of all of the expenses you have to pay, typically each month. You can use apps and share with everyone in your household to keep everyone on the same page. Over time, you can compare your budget to your actual spending. This will show you where you are spending too much and help you get on track.
Though budgeting may sound like you don’t get to buy anything fun, that’s not true. You can budget in amounts each month to spend on restaurants or whatever you consider fun.
4: Start a Savings Account
Financial experts say you should put about 15% to 30% of your earnings away in a savings account every paycheck. That 15% is the bare minimum. If you have dreams of early retirement, the more you save, the better.
To keep yourself from dipping into your savings, make it a separate account from your checking account. Don’t connect your savings account to any shopping sites or credit cards, and don’t withdraw from it casually. Only dip into your savings if it is an emergency, and even then, you should consider making an emergency fund. This will make it so you don’t have to take from your savings when something comes up.
5: Start an Emergency Fund
An emergency fund is there when you have unexpected expenses, like car repairs or a hospital bill. It will help you if you lose your job or get sick.
Only 4 in 10 Americans could pay $1,000 from savings if something unexpected came up, according to a Bankrate survey. Not a lot of us are prepared for an emergency like a hospitalization or a lost job. But wouldn’t saving some money for those life events be better than having to start a GoFundMe?
Financial experts say your emergency fund should be about 3 to 6 months of your salary. If that sounds like a lot, it is, but you can start small. Some small but attainable goals for your emergency fund might be: $5 a day; a portion of every paycheck; or making coffee at home and depositing the money you didn’t spend on drive thru lattes in your emergency fund.
6: Don’t Have a Credit Card, or Use it Very Sparingly
This can get complicated, because if you don’t have any credit history, it’s hard to do things like get car loans. However, there are ways to establish credit history without using credit cards, like a gym membership.
If you have a checking account with a bank, you can often get a secured credit card. A secured credit card requires you to keep a certain amount deposited, and that amount is your credit limit. This is a good option if you want to build some credit history.
If you have a close family member who has a good credit history, you can be added to one of their cards as an authorized user. You get to benefit from their good habits that way.
7: OR Pay Off Your Credit Card Right Away
If you do have a credit card, using a lot of restraint will help you stay out of debt. Only use your card when you know you can pay it off as soon as the bill comes. Otherwise, you’ll be paying interest and getting deeper in debt with every month you have a balance.
One method for doing this is to open a store credit card at a store you frequent. If you make an affordable purchase at that store, you can often pay your bill at the register right after. This way you’ve taken on some debt for your credit history, but showed you can pay it off right away and avoided the high interest rates many store credit cards have.
8: Debt Repayment Strategy
If, like most Americans, you have some debt to pay off, there are some strategies that can help you reach the finish line.
In the snowball method, you pay off your debt starting with the smallest debts first. Make a list of your debts from smallest to largest. You make the minimum payment on all of your debts, except the smallest one. Pay as much as you can on the smallest debt.
Once you have paid off your smallest debt, mark it off your list and move on up the line. Getting your smaller debts paid off will be motivating and help you get momentum to keep paying off your debt.
9: Practice the One-Week Rule
The one-week rule is simple. Before you make a purchase, challenge yourself to wait a week and think about whether you really need it. Removing the impulsivity from your purchasing decisions can help you make better choices. You may often find you didn’t really need what you wanted.
You may also find that you still need and want it, but you were able to plan the purchase into your budget. This will help you make thoughtful spending choices and avoid placing more debt on credit cards.
10: Settle for Less Than You Owe
If you know your creditors and how to contact them, it is often possible to negotiate a settlement of your debts. That means your creditor will allow you to pay a lump sum, which is often a lot less than you owe overall, and that debt will be resolved.
If you feel you can do this on your own, that’s the best option. If you feel like you need help negotiating, there are many businesses that will try to negotiate settlements on your behalf for a fee.
While they’re negotiating, they may require you to make regular deposits into an account that will go toward the settlement amount. The negotiating business may not be able to reach a debt settlement for all of your debts, so this is something to consider before working with a third party.
Another factor to consider when working with a debt settlement company is that when they secure a smaller settlement payment, the difference is considered income by the government, meaning you have to pay taxes on it.
Whether you work with a company or try to settle your debts yourself, with some careful planning and negotiation, you could soon be on your way to living a debt-free life.