If you’re in debt, you’re not alone. Student loans, credit cards, and car loans sink thousands of people into debt every day. Life can feel like a dark, never-ending hole when you have more expenses than money in your accounts. However, it’s really not the end of the world, and you’re not an awful person for falling into debt. With patience and financial smarts, you can climb out of that pit with the tallest ladder.
Eliminating your debt will require you to take an in-depth look at your current finances. We all have money habits we’re not proud of, but without acknowledging them, we don’t make progress. If you’re constantly on the lookout for the next big sale — or if you spend with a blindfold on — it’s time to bulldoze those habits. Once you discover clarity, you’ll clear a path to better finances.
1. Set a Budget
Separate your wants from your needs. Having cocktail hours every weekend is fun, but the strain it puts on your wallet is decidedly less pleasant. If you’ve never budgeted before, start by recording everything you spend for a month. Type it in your notes app or keep a special notebook for it, but have a solid record of your spending. No expense is too big or small to record. Study the trends at the end of the month and decide where you can make cuts.
Once you knock out that first month, you can establish a comprehensive plan for saving and spending. If you’re not great with calculating these things, you’re in luck — neither am I. That’s why I use budgeting tools like EveryDollar and You Need a Budget to help me figure out my finances. Punch in your numbers, and your program of choice will provide a detailed financial picture while offering suggestions on what to cut.
2. Put the Cards Away
Credit cards open you up to making big purchases you can’t afford. Research has found that spending with a credit card can make you feel like you’re not giving up real money, causing you to lower your inhibitions. A debit card or cash transactions draw money directly from your finances, while credit cards create a buffer between the purchase and payment.
When you have to pay your bill, though, you’ll discover that, yes, this is real money. Every cent is coming out of your bank account.
Cash forces you to handle and count the money before giving it away. You may find you’re more reluctant to part with your bills when you see them leaving your hand. Tangible funds curb extravagant spending and enable you to make better financial decisions. If you wouldn’t rush to dump a wad of $100 bills on eyeshadow palettes or high-tech devices, don’t do the same with your credit cards.
3. Pay More Than the Minimum
One of the pillars of financial responsibility, according to financial expert Dara Duguay, is diminishing credit card debt by putting forward more than the minimum payment. This method doesn’t mean throwing $150 at your dues if you don’t have the funds — increase your installments by $5, $10 or $15.
Pay in manageable increments to avoid overshooting it and living off ramen for the rest of the month. Exceeding the monthly minimum, even by a small amount, reduces financial charges such as interest and late fees.
If you follow the first step and create a budget, you’ll likely find areas where you can reduce spending. Remember those cocktail hours we mentioned? Take the money you’d spend on those and put it toward your credit card payments instead. That way, you don’t have to feel like you’re scraping up money you don’t have. Take it from a place that’s doing more harm than good and use it for downsizing debt.
4. Find Your Net Worth
Your net worth encompasses everything you own, including bank accounts, investments, and assets. Financial expert Stefanie O’Connell recommended calculating your net worth to get an idea of the big financial picture. Net worth may be a term you mostly associate with wealthy celebrities and social media influencers, but surprise — you have one, too.
It’s OK if your “what I own” category is smaller than you expected — everyone has to start somewhere. After you calculate this, make a list of what you owe. Then subtract this amount from what you own to come up with your net worth. Some online calculators predict how this number can grow or decline in the future, allowing you to make plans early on to hit your goals.
There are little things you can do to increase your net worth and transform your financial planning from frightening to relieving. Your negative net worth will soar once you become wiser with your money.
5. Increase Your Income
Earning more money is a surefire way to reduce your debt, but that can be easier said than done. If you have a full-time job or work multiple gigs, you may not have enough time to accept another stream of income. Focus your efforts on your current employment rather than seeking a new occupation — unless, of course, your job pays in pennies. It’s time to fly the coop and find a new place if that’s the case.
Ask about receiving a raise or promotion, and give solid examples of why you think you deserve a shot. You may have a laid-back employer, but many bosses require some proof of your stellar skills before offering the perks. Work on your career goals in the meantime. Show your employer you’re responsible, good at problem-solving, and able to handle leadership. Higher positions come with more duties, and you’ll need to prepare for the opportunity when it comes.
If you can afford to adopt a new side hustle, go for jobs you’ll enjoy. Driving for a rideshare company, freelancing, selling handmade trinkets online, and hosting for Airbnb are all common ideas.
6. Readjust Your Tax Payments
Many people are ecstatic about receiving a large tax refund each year. However, they may not realize they can access this money earlier by applying deductions. Deductions will lower your taxable income, thus putting more money in your pocket. You could already have those funds sitting in your account instead of waiting for a year-end payout. Go for the standard deduction that applies to your filing status, or itemize them if they pass that amount.
Stop paying more than you need to by adjusting how much you owe the IRS. It’ll require some detailed recalculating, which you can do with a tax professional or a money-savvy relative. If you handle it all yourself, though, it’s time to take a refresher and see where you can save. You have a few options for kicking off the process — estimate your tax liability for the year, fill out a new W-4, or even start a retirement account.
Estimating your tax liability means looking through your previous returns or using a tax calculator to predict what you’ll owe for the year. The amount can decrease based on several factors, such as claiming a dependent, starting a business, or applying itemized deductions. Creating a retirement account also lowers your taxable income, which changes your tax liability. Once you’ve figured your new liability, fill out a W-4 form to reflect the modified amount. This step tells your employer how much to withhold.
7. Check Your Credit Report
If you’re figuring out your net worth but don’t have a complete idea of what you owe, your credit report can help. Credit reporting companies — Equifax, TransUnion, and Experian — allow you to request one free report every 12 months. It’s excellent for those of us who fear our finances. Order it once a year, and spend the rest of that time making moves to build your credit.
You can also order reports through all three companies and stagger them throughout the year. Doing this gives you a comprehensive look at your credit and how it changes over time. This information enables you to adjust your spending and saving habits accordingly. Plus, it doesn’t hurt to see your debt shrink as you chip away at it — this can offer a much-needed motivational boost.
These reports don’t include your credit score, however. They give information about your credit accounts, payment histories, and credit limits. You’ll also see what types of credit you own — mortgage, student loans, or car loans, for example. Check your credit card statement or your online bank accounts if you’re curious about your score. Check your credit card statement or your online bank accounts if you’re curious about this number.
Follow these steps for kicking debt to the curb, and you’ll be on your way to becoming a financial master. Be patient with yourself, remove your emotional roadblocks, and track your accounts closely — making a slip-up or two isn’t uncommon in the first few months. Once you’re over the hill, you’ll find money-green pastures.