Let’s be honest: everybody needs to get out of debt.
When you’re in debt, be it a small credit card debt or a scary mortgage or student loan, it can be easy to pretend everything is fine or bury your head in the sand. Only at some point you are 30, 40, 50, and you still wonder why this debt is just getting bigger and you still have no money saved for retirement or need to live paycheck to paycheck. The truth is, debt is like a snowball and it will just keep rolling and getting bigger and bigger as long as you run away from it instead of facing it.
Americans are buried in debt. Mortgages, credit cards, bills, student loans, you name it. In 2020, Experian reported that the average American owes approximately $92,727 in total debt — the highest amount on record in the U.S. Chronic debt is one of the main reasons why the poor stay poor. Not misfortune, not lack of possibilities… debt.
I know I know, getting out of debt can feel impossible when you’re barely breaking even financially. When I ask somebody why they aren’t doing more to get out of debt, the answer is usually the same and it’s that they can’t do more because they don’t have any money left after expenses.
But guess what, debt is what’s keeping you out of money and if you don’t start doing something that you haven’t tried so far, tomorrow you are going to be in the exact same unpleasant situation as today. Or worse.
So, if you’re wondering how to get out of debt (for good), you’ve come to the right place. With this video I’m going to give you a step by step process that is guaranteed to get you out of debt and the more of these steps you’ll follow, the faster you’ll finally get rid of it.
So my friends, this is how we are getting out of debt:
- Getting to the root of the problem
- Cutting your expenses
- Increasing your Income
- Attacking your debt
Act on all of these 4 pillars after watching this video, and I assure you that you’ll manage to be debt free sooner than you expect. Let’s start.
Getting to the root: Why do we get into debt?
Before getting into “get out of debt” strategies, it’s important to understand why we get into debt in the first place. And this is because no matter how we fix our current debts, if we don’t fix the financial habits that took us to get into debt we are going to fall into the same trap again.
Now, except for some big debts like a mortgage or a student loan, most debts are driven by the fact that you want things you don’t need, you don’t realize that partial payments are not making it more affordable, and you can’t see the chain of negative consequences in the long term. The truth is, we live in a consumer society where we judge other people by what they have and get judged by what we have.
None of us really buys a 1200€ IPhone because we need it, but because we want to be part of the wealth that this IPhone represents. Easy. Everybody knows that. And the answer from everybody is: “I know I don’t need it, but if I find a way to get it, what’s wrong about it?”
And therefore we get to point 2:
You don’t realize that partial payments are not making it more affordable.
This is the first point where everybody stumbles, and I mean really everybody.
If you earn 2000$ per month and after expenses you are left with 200$, and you absolutely want to buy yourself a 1200$ phone, you just can’t afford it. If they give you the option to pay 30$ per month, you are not paying it less. It’s a psychological marketing trick which in my opinion is close to a scam.
The only reason why we fall into the trap of thinking that something is more affordable with debt or with monthly payments, is because we lack perception of the long-term. Remember this: Debt Borrows From Your Future Income.
Any time you take out a loan or charge something on your credit card, or buy something in instalments, you’re borrowing the total sum from the “Yourself” of the future.. So don’t look at the short term feasibility, look at the long-term consequence.
Do you really want to spend your money for months and months paying for something you’ve already used up and don’t get much value from anymore?
The formula is pretty easy so remind yourself this everytime you want to buy something: if you can’t afford to pay for something with a single payment, you can’t afford it at all.
And point 3, You can’t see the chain of negative consequences that will derive from that purchase in the long term.
Unhappiness and Frustration for being always out of money, Fear and shock of the Unpredictable, Anxiety and Depression, you name it. But believe me: as soon as you’ll be debt free and your bank account will show a number that can sustain you for months without working, you’ll get into a totally different emotional state.
2. Cutting your expenses
2.1.Categorise your expenses
If you have debts, truth is, there is something to fix with your expense habits, and this is the first element that you need to address if you want to start digging your way out of debt, one step at a time. In most cases, and this probably applies to you too, you don’t have a good overview of your expenses, so let’s see how we can fix that.
First of all you need to reevaluate your needs and your wants with the goal to cut unnecessary expenses. This is by the way something that everybody should do, with or without debts, because it gives you a clear idea of where your money really goes every month.
Now, to start this, take a paper and a pen, or your phone, or your computer, whatever you like. Create 3 columns and call them DEBTS, NEEDS and WANTS, and on top, write down your monthly net income. Let’s say 3000$ just for the sake of this video. Now start listing the column debt: If you pay a mortgage, start by writing down how much you pay for it every month. Let’s say 1200$. Then maybe your auto loan, 400$, then credit card debt, 150$, student loan, 250$.
Now, in the column “Need” you are going to list all the things that you have to pay for, which are necessary and cannot be avoided. An example would be the monthly rent for your flat if you don’t have a mortgage, but in this example we go for the mortgage. Then you have utility bills, like water, electricity, gas, internet. Let’s say 70$ for water, 110$ for electricity, 60$ natural gas, 70$ for internet.
Then basic groceries, namely the food that you buy for home and not the money you spend to go out for dinner. Let’s assume 300$ here.
Then Transportation, like your tickets for public transportation or your car expenses like gasoline. Let’s put 100$ here.
Then we have insurances. Dental insurance, pet insurance, legal protection insurance. Let’s say 20€ per month.
So now let’s move to the Wants. They are everything you can live without but you still buy because you want to. Quick note here: usually you are going to tend to write less wants here than the ones you actually have, because some wants like a phone or a computer are one time expenses. But we’ll see how to consider them.
Let’s start from your phone. Think how often you changed your phone in the last years and how much you pay on average. Divide the sum by the number of months that you keep the same phone and you get the monthly spend for that purchase. Let’s say you come out with 100$ per month. Now let’s move to the shopping: How much do you spend on average in clothes shopping? Let’s say 100$ per month. Dining out and bars? 200$. Cable for TV, Make up, Video games… Whatever comes to your mind, try to estimate an average monthly expense.
Now that you’ve written everything, try to calculate the sum of each column and the total sum. You’ll be surprised to see how much you spend every month and how much of it is spent on needs. In this example, I come out with 2025$ of debts, 730$ of needs, and 545$ of wants every month, which gives a total of 3300$.
As you can see in my example the expense is higher than the income, meaning the debt increases over time. This is the worst situation of course. If your income would have been higher than this sum, then you should already consider using what’s left to pay off debt.
Now I want you to notice this: If you sum the debts and the wants you get something around 2600$, which is just incredible. Even if you take out the mortgage of 1200$, that we can say is necessary, you are left with around 1400$ that you are paying every month for avoidable debts and wants, that in the long term means more than half a million dollar spent in only 30 years. Half a million.
Now this of categorising your expenses is something you shouldn’t underestimate. It’s a powerful exercise that is essential to get back in control of your finances and it’s the first step to reach financial freedom.
2.2.Cutting your expenses
So after evaluating and categorizing your monthly expenses, what’s the next step? The next step is reducing Needs and Wants, so that you can save some money and use it to reduce debt. Notice that you can and should act both on your Needs and your Wants, but that you should put more focus on your Wants because they have much more potential for reduction.
You can act today in your Wants column by decreasing it, so that the Debts column will decrease over time and in the end with no debt you’ll have much more freedom for your needs, your wants and for investments.
So how do you cut expenses? You do that by working on your needs and your wants. Let’s start with the wants: Here there are 2 ways you should both adopt:
- From now on, never pay on instalments. Nothing more. Never buy consumer products like phones, TVs, laptops and electronic gadgets if you don’t have your money on hand. And ignore also the instalments with zero interest rate. Even if you are going to pay the same, always remember what I said before: if you can’t afford to pay for something with a single payment, you can’t afford it at all.
- Cut expenses. You don’t need to buy new clothes every month, no need to buy a new phone every year and above all no need to spend 1000$ on a phone. And also, stop going out to restaurants and learn the beauty of cooking at home. Going to a restaurant or ordering food is so much easier than making meals at home. I know. But while you’re enjoying the freedom of not having to cook, you are spending 10 times as much as you would spend if those meals were prepared by you. Same goes for drinks, you can invite your friends over instead of going to a coffee shop or a bar where you spend 5$ for a coffee or 10$ for a cocktail. And if you have memberships that you are not using, quit them. Same goes for cable tv: you can find all your favorite shows online so no need to spend every month for cable. As long as you have debts in the debts column other than a mortgage, you should cut the wants so much that they should almost disappear.
I know it’s going to be hard to give up all these things, but the pain that debts are going to cause you in the long term are way worse than the joy that your material wishes are giving you today. Cutting down your expenses is a matter of discipline and long term sight, but you can also help yourself and you do that by cutting up your credit cards. Shred ’em. Burn ’em. Do whatever you like but stop using credit cards to buy more than you can afford.
Now, after your Wants, let’s concentrate on the needs. Utility bills can be reduced up to 50% and more just by being more careful with your home habits. Don’t keep your tv on if you are not watching it, same goes for lights, water and all other electronic appliances. I’m not going into details on consumption habits at home, but all statistics indicate that the average consumption for utilities in the US is 3 to 4 times higher than the average in developed european countries like Germany or France, therefore there is a lot of room for improvement.
Other than the utilities, you can still reduce your Needs a lot. For example, you can save a ton of money just by showing a coupon to the cashier when you buy groceries. And in general, try to be more aware of what you buy in groceries and also buy discounted products whenever you find them.
Then, If you have kids, and let’s say that clothes for your kids are a need and not a want, try consignment shopping: Kids grow out of clothes so fast and it’s not worth it to go into debt for your two-year-old’s ever-changing wardrobe. Check out your local consignment stores that sell outfits in good condition. And if you’d rather shop online, try sites like thredUP and Swap.com.
Then you have the car, which is one of the worst money leeches. If possible, use public transportation and this will save you thousands of dollars every year.
Now, look at that. 545$ of wants are gone, as well as 400$ of car loan. A 1000$ per month is saved and can all go to repay your debts every month.
3. Increasing your Income
As you can see, reducing your expenses can already do a great deal of good to your finances, but what if it’s not enough, or what if you want to get debt free faster than that? Besides reducing expenses, you should try to increase your income. Here a couple of solution for this:
1. Sell out what you don’t need
Maybe you don’t have much, but most people I know who live paycheck to paycheck still spend hundreds of dollars every month on clothes, phones and other stuff. You don’t have to go minimalistic, but most probably there are things you don’t really need which lie around in your home. You can sell items on Facebook Marketplace, Craigslist or Ebay.
And by the way, the fact that you reduce the number of consumer products you possess is not only helpful because you can get money by selling it, but above all because having less things around relieves you of the addiction of buying and makes you understand that you can actually live pretty well without being surrounded by things.
2. Start a side hustle.
Number 2 is starting a side hustle. You can start your own business, and by the way you should subscribe to my channel because I’ll soon publish a nice video about side hustle you can start. Maybe you are good at making things? Sell your products online. Do you love animals? Maybe start dog walking or pet sitting.
Become a driver for Lyft or Uber. Or make deliveries to bring in extra money. I know that sometimes time and energy are limited, that’s why you should focus more on reducing expenses, but still there are are millions of possibilities to make money online and offline and not only they are going to bring you more money, but you are also going to have less time to spend it.
3. Work for a raise and ask for it.
I know it may sound obvious, but most people don’t even try. Go to your boss and ask for a raise, what do you have to lose? And if you think that you didn’t do much to deserve a raise, then think about working more and showing your value.
4. Change Job.
And if you can’t receive more money with your actual job? I know sometimes it’s hard to find a job, but consider looking for another one. In most cases you are going to be able to receive at least 5 or 10% more and this is going to help you immensely in paying off debt.
4. Attacking your debt
So, after reducing your expenses and increasing your income, you should be able to have a substantial sum every month that you can use to pay off your debts.
There are two major ways to tackle debt. The “avalanche” method and the “snowball” method. The avalanche approach focuses on interest rates, namely you pay off your debts with the highest interest rates first. You’d throw as much money as you can at them, and pay only the minimum on all your other loans. When the debt is gone, you move to the next with a lower interest rate and so on until you are finished. The snowball approach instead works by tackling the lowest amount of debt first, paying it off, and then tackling the next loan until you get to your loan with the biggest amount, regardless of the interest rate.
Interestingly, most people with debts tend to prefer the snowball approach, in which you start by paying off the smallest debt. This is an interesting result that came out of many researches and indicates that people are “debt account adverse”. That means that if you have multiple debts, you tend to focus on reducing the total number of debts rather than the total of associated costs, and you know that reducing the number is going to be easier if you start with small debts.
The most clever approach is the avalanche method , though, because if you tackle the debts with the highest interest ratio first, regardless of how big the debts are, in the long term you will have wasted less money on interest.
Traps to Avoid When You’re Getting Out of Debt
Okay, so far we’ve seen how important it is to understand why we get into debt in the first place, we learned how to control our finances and reduce all elements of our expenses, and we found out what are the two most common ways to pay off debts.
Now, if you read about debts you’re going to find all kinds of tips on how to get out of debt and some solutions are useful in theory, but dangerous in practice. So I’d like to use this last part of the video to address two strategies that you might use but may cause more damage than help and I’ll explain why.
The first one is the so-called Debt Consolidation. In a few words, if your credit rating allows it you can get a larger, lower-interest loan and consolidate all your consumer debts into this loan. Now, this is in theory a great thing because you are going to pay less interest, in fact in one of my last shorts I mentioned it as a suggestion.
But you also need to consider that in most cases it’s going to keep you in debt longer and having less to pay every month you carry the risk, if you are not disciplined enough, to contract new debts.
The second is the so-called Credit Card Balance Transfer.
Once you transfer your balance to a new credit card, you suddenly have more credit available to you. This again, might be a great thing, but you have to be disciplined enough not to make purchases on your old credit card. Moreover, consider that you are going to have balance transfer fees and the transfer can also negatively affect your credit score.
If you ask me, I believe that 90% of the solution lies not in these small tricks with the loans, but in changing your financial lifestyle and mindset and that’s why I focused most of the video on how to get in control of your expenses. Being able to pay off debts is a direct consequence of healthy financial habits and you can try whatever trick you want to reduce interest rates but as long as you don’t change the way you approach spending, you’re always going to find yourself in debt.
Being deep in debt is stressful for your health. You are going to worry over how to pay the bills, struggle to save for the future, and the stress over finances itself can make it more difficult to save money. On the other side, learn to control your finances and avoid not necessary expense and you’ll see that you’ll dig out of debt much faster than you think and you will see great benefits not only for your wallet, but also for your health.
Well, I hope the content of this video has been helpful to you, and if it has, don’t forget to subscribe to my channel or you’ll miss many more videos like this. Thank you very much for watching and I’ll see you in the next video. Ciao!