Managing Debt: How to Get Out of the Red and Stay There

January 27, 2023

Americans are in debt due to mortgages, credit cards, personal loans, bills, and student loans, and the total amount owed is increasing. Experian reported in 2020 that the average American owes an estimated $92,727 in total debt, the highest amount on record in the United States. Generation X owes the most, at $140,643, followed by Baby Boomers ($97,290) and Millennials ($87,448).

At some level, anyone dealing with debt can say that it is a source of stress. Being in debt can limit your ability to achieve financial goals. When you owe a lot of money, the funds that could be saved for financial emergencies, retirement, and large purchases instead go to your creditors.

The good news is that there are solutions to help you get out of debt and, hopefully, stay out of debt. Here are some of them.

Own up and face them

The first thing you need to do is to face the music. Clear an evening and sit down to review your debts and obligations list. Your base payments will be loans, credit card payments, and bills for necessities – power, heat, and water. If these significantly exceed your net income, you will either have to change your lifestyle drastically (sell the house, move to a smaller apartment, take on a second job) or file for bankruptcy. Alternatively, depending on where you are, you may take other steps. It would be best if you first devised a strategy.

Create a debt payoff strategy

Create a debt repayment plan to help you organize and stay on track. Choose which debts to include in your debt payoff plan, then decide which ones you'll prioritize paying off first.

For most people, paying off your mortgage early makes no sense because the interest rate on home loans is low, while the amount of money required to repay a mortgage ahead of schedule is high. While you probably don't want to include your mortgage in your payoff plan, high-interest debts like credit cards and payday loans should be.

Once you've determined which debts to include in your debt payoff plan, work your way into repaying all debts. One popular strategy is the snowball method, in which you pay the minimum on all of your debts except the smallest, which you will pay as much as you can. By "snowballing" payments toward your smallest debt, you'll quickly eliminate it and move on to the next smallest debt while paying the minimum on the rest.

Live on a budget

When creating a budget, consider your current expenses to see where you can make realistic and sustainable cuts. You can prioritize extra debt payments by eliminating unnecessary spending. After you have paid off your debt, you can create a budget to ensure you live within your means and begin to build financial security.

There are various budgets to choose from, but a more detailed budget approach, such as a 50/30/20 budget, is often best for those paying off debt. This means that you spend 50% of your income on necessities, 30% on discretionary spending, and 20% on savings.

Build an emergency fund

This might be quite a challenge since you're dealing with debt, so it's best to start small. Build up your emergency fund as much as possible while paying off your debts with the majority of your extra cash. Then, later on, work on expanding it. Budgets cannot always account for unexpected events. Unfortunately, unexpected expenses when things go wrong are a significant cause of debt for many people. You can break this cycle by slowly building an emergency fund.

Track your expenses

If problems arise, your emergency fund can keep you from borrowing, and your budget can keep you from going into debt to cover routine expenses. However, this is only effective if you stick to it. Tracking your spending is a great way to hold yourself accountable as you have a visual cue that you are living within your means and staying on track regarding your debt payoff plans. While creating a budget and keeping track of every dollar may be a lot of work, it will be well worth it once you've made significant progress on debt repayment, established an emergency fund, and can hopefully break the cycle of debt.

Final thoughts

Getting out and staying out of debt requires commitment and planning. Take the time and evaluate the debts you have amassed and your spending habits. Breaking free from the bonds of debt can be difficult, but by implementing these strategies, you can begin to make progress toward getting out of debt and improving your overall financial health.

This article was written by our guest blogger, Chatty Garrate.

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