Get Out of Debt: EasyTips

Before we dive into talking about how to get out of debt let’s look at the facts. According to the Federal Reserve, people in the U.S owe at least 10% of their disposable income to debts like personal loans, credit card accounts, car loans, and student loans. A survey conducted by the Pew Research Center highlights that 50% of adults who lost their jobs due to the Covid-19 pandemic can’t find employment, and about 25% of American Households find it challenging to pay their bills.

New York’s Federal Reserve Bank reports that total consumer debt reached $4.163 trillion, including credit card debt ($956.5 billion), car loan debt (1.2 trillion), and student debt ($1.7 trillion). According to Nerd Wallet’s survey results, the average American household mortgage debt is $185,591, credit card debt ($6,741), auto debt ($27,630), and student loan debt ($47,634).

The NFCC Financial Literacy survey shows that 25% of Americans do not pay their bills on time, and 62% had credit card debt in 2020. Although 57% of adults in the U.S grade themselves “A” or “B” on their financial knowledge, they can’t manage to pay their bills promptly. The question is: how to get out of debt? Here are a few practical tips. Read on!

Determine Who and What You Owe

It is crucial to find out who you owe and the amount of money you owe. Experts recommend using a priority list to pay your debts. For instance, which debt you want to repay first – is it a mortgage loan, personal loan, or car loan?

If you don’t have enough financial assets or money to carry out your day-to-day activities, you should pay back your debts based on what will happen if you fail to pay your bills. Answer the following questions:

What is the status of your loan?
What has legal action been taken?
Do you pay interest rates? If yes, how much?
What will happen if you fail to pay your bills promptly?
Does the creditor offer a “grace period” before the collection?
If you miss a payment, will you pay the remaining balance in full?
Will the creditor harass you, and will you lose assets?

When you don’t have enough money to pay off your debt, you must determine the consequences, especially if you don’t pay each debt immediately. We recommend prioritizing:

Priority of your Debt Repayment
1^st priority	· Rent or mortgage · Insurance · Secured loans · Utilities · Auto loans
2^nd priority	· Finance companies · Credit cards
3^rd priority	· Hospitals · Doctors · Dentists · Other health-related debts

Determine How Much You Can Pay Back

Once you know who you owe and the amount of money you owe, it is time to decide the amount of money you can pay to each creditor. Focus on the time period it will take to pay back your debt in each category. What can you do if your monthly payments are higher than the amount you pay from your month’s check?

We suggest limiting the credit amount you owe, except for your mortgage, to 10-20% of your monthly pay. For instance, if you earn $3,000 a month, keep your credit payments under $300 or $600 per month based on the 10-20% rule.

[$3,000 x 0.10 = $300]

[$3,000 x 0.20 = $600]

However, if you have several debts, you can use 25% of your monthly take-home pay to repay your debts. In that case, you will use $750 to repay your debts. The remaining 75% of your income is essential to maintain your day-to-day expenses.

Plan to Pay Back Your Debts

Once you have a clear picture of your overall debt, decide the amount of money you will pay each creditor and the time period it will take. Create a solid plan to ensure paying back your creditors within three or five years. You can set up your strategy based on using one of the three methods or principles, such as:

Pay each creditor an equal amount
Give a large portion to one and pay minimums on the others
Pay off your debt based on the creditor’s original agreement
Pay off debt from smallest to largest, also known as the debt snowball concept

Choose one method of these four based on your situation and financial status to ensure you pay off your debt on time. Let us give you an example of the first method to help you understand the concept. Continue reading!

Method 1: Pay Each Creditor an Equal Amount of Money
Your Debts	The amount of money you owe	Minimum pay required by the creditor per month	Amount of money you can pay per month
Credit Card	$3,000	$150	$100
Bank Loan	$4,000	$300	$100
Dept. Store	$2000	$120	$100
Jewelry	$700	$50	$100
Total	$9050	$620	$400

Consult Your Creditors to Discuss your Plan

After you have made a robust plan, it is wise to cut up all your credit cards and avoid getting more loans. Call each creditor and schedule appointments with them to discuss your scenario. Explain to each company, creditor, or bank that you don’t have enough money to repay the minimum required money specified on the monthly statement. Make sure you give each creditor the following information.

Reasons you fell behind in repaying your debt
- Rising taxes
- Alimony divorce
- Insurance premiums
- A family member’s death
- Poor money management
Your current income
Day-to-day obligations

Moreover, tell your creditor about your plan and explain how much you can pay back per month. Make sure you use the power of negotiation to ensure they drop interest charges under challenging situations. Your plan should be acceptable to your creditor, and after reaching an agreement, we recommend sticking to your plan.

Learn to break bad money habits.

Final Words

For many Americans, it is often challenging to get rid of piled-up debts because they don’t have enough money to repay the minimum monthly payment. The good news is that a debt management plan can solve your financial issues. The tips given above can help you pay off your debt promptly.

However, getting out of debt requires commitment, dedication, and self-discipline. Make sure you keep your expenses under control and stick to your plan by staying patient, diligent, and motivated. Get more guidance from Colorado’s best financial coaches by setting up a consultation. Until Next Time!