8 Ways to Get Out Of Debt and Start Saving

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Being in debt can create an emotional burden that is difficult to escape. In fact, research has shown that people in debt expend a significant amount of mental energy worrying about the money they owe.

A 2017 study conducted by the American Institute of Certified Public Accountants (AICPA) found that over half of Americans in debt said it negatively affected their lives, with 28% saying their debt caused them anxiety when it came to simple, everyday financial decisions.

If you suffer from stress or anxiety caused by being in debt, getting a plan in place to get out of debt and start saving will improve not only your finances, but also your emotional well-being. Below, you’ll find eight tried-and-true ways to get out of debt and start saving.

1. Debt snowball

Popularized by personal finance author and podcast host Dave Ramsey, the debt snowball method involves paying off your debts starting with the smallest balance and working up to the largest. Thus, you create a virtual snowball as you slowly pay off your balances.

With this method, you still make the minimum monthly payments on all of your accounts, but you also put an extra amount toward one particular debt each month.

The debt snowball is ideal for debtors who are motivated by the “quick wins” that accompany paying off balances in full. People often find themselves encouraged to keep going as they see themselves pay off account after account.

Pros

  • The “quick wins” that accompany the snowball method often motivate people to stick with this debt payoff strategy.
  • If you have an immense amount of debt from multiple sources, you might benefit from this strategy since you’ll see success early on, which could inspire you to keep going.

Cons

  • The debt snowball method may not save you any money since you’re paying off debts from smallest to largest without taking interest rates into consideration.

2. Debt avalanche

The debt avalanche method is another popular debt repayment strategy that experts often recommend in place of the debt snowball method. The debt avalanche involves paying off your debts from highest interest rate to lowest interest rate. You still make the minimum monthly payment on all of your accounts, but you add an extra amount of money each month toward the debt with the highest interest rate.

Although it can be more challenging to stay motivated using this debt repayment strategy instead of the debt snowball method, you will save more money in the long run by paying off debts with higher interest rates first.

Pros

  • It’s financially smarter to use this method than the debt snowball method. By paying off balances with higher interest rates first, you will save money.
  • You will pay off your debt faster than you would with the debt snowball method.

Cons

  • It could be difficult to stay motivated. Because accounts with higher interest rates could take longer to pay off, you might not see any progress for a while.

3. Balance transfer credit card

If most of your debt is high-interest credit card debt, you may want to consider a balance transfer credit card. Balance transfer credit cards these days come with promotional no-interest periods of up to 21 months. It’s best to pay off the balance during this time because interest rates can skyrocket after that.

You may have to pay a 3% to 5% balance transfer fee, but the money you save on interest payments could make up for that. You may also be able to transfer multiple balances, leaving you with one monthly payment instead of many to keep track of.

Pros

  • If you have good credit, you may qualify for a balance transfer card with a long 0% interest period, allowing you to save money in interest.
  • You only have to make one monthly payment.

Cons

  • If your credit is less than stellar, you may not be able to get a balance transfer card with good enough terms to make the transfer worth it.
  • You could face interest rates even higher than your original cards had if you make a late payment or don’t clear your balance before the introductory period ends.
  • You may be tempted to run up more debt on your old cards, thus increasing your overall debt.

4. Debt consolidation loan

A debt consolidation loan is another way of combining all of your high-interest credit card debt and paying it off at a lower interest rate with one monthly payment.

Debt consolidation loans are a type of personal loan. They often have lower interest rates than regular credit cards. And because they’re installment loans, you pay back the loan with a set monthly payment over loan terms that are typically 24 to 60 months.

As with a balance transfer credit card, you may benefit from the simplicity that accompanies having just one monthly payment as opposed to four or five.

Pros

  • If you have good credit, you can secure a personal loan with a decent interest rate, which could save you money in the total interest you pay.
  • You only have to make one monthly payment.
  • Personal loans have fixed interest rates, which may make your payments easier to budget for than a credit card, which has a variable interest rate.

Cons

  • Although you can secure a personal loan with subpar credit, you might struggle to secure a loan that has optimal terms.
  • A debt consolidation loan likely has a higher interest rate than the best balance transfer cards do during their promotional periods.

5. Debt management plan

If you think you need the help of a professional on your journey to pay off debt, you might want to consider setting up a debt management plan with a nonprofit credit counseling agency.

A credit counselor will work with you to create a debt repayment plan and they’ll negotiate with creditors to ask for a lower interest rate. Once the plan is in place, you’ll pay the credit counseling agency each month, and it will disburse that payment to your various creditors.

Pros

  • In addition to helping you pay off your debt, your counselor will teach you how to incorporate healthy financial habits into your life so you can avoid getting into debt again.

Cons

  • Your credit could be negatively affected. Most debt management plans require you to close all of your credit cards, and doing so could cause your credit utilization ratio to rise and your credit score to fall.

6. Debt settlement

Some people have a substantial amount of debt, and they don’t anticipate ever being able to pay it all off. If you feel like you fall into this category, there are a handful of ways you can get rid of your debt, one of which is debt settlement.

Debt settlement usually involves working with a company — called a debt relief firm or a debt settlement firm — that will attempt to negotiate your debts with your creditors on your behalf. Unlike credit counselors, the aim is not just to lower your interest rates, but to keep you from having to pay off at least part of the debt altogether.

To do this, debt settlement firms have you withhold all payments to creditors, sometimes for months. That’s the leverage they use to settle your debt, but it will tank your credit score.

There is a fee to use a debt settlement company, and it’s often a percentage of the total debt enrolled in the program. But you can attempt to do this on your own. Note that debt settlement is only for unsecured debt, such as credit cards and medical bills.

Pros

  • You could end up paying significantly less than you owe if the debt settlement company is successful in its negotiations.
  • A professional isn’t necessary. You can always attempt to settle your debts with your creditors on your own behalf.

Cons

  • There is no guarantee the debt will be negotiated down.
  • Scams are fairly prevalent in this industry, so you have to proceed with caution.
  • Your credit score could be impacted negatively for years to come.

7. Bankruptcy

Bankruptcy is often considered a last resort because of its detrimental impact on your credit. But for some people who are deeply in debt, it’s the only option.

Bankruptcy involves liquidation of some (Chapter 13) or all (Chapter 7) of a person’s assets. It should only be considered if you don’t envision that there is any other solution that can help you get back on your feet.

Pros

  • You’ll get a clean slate when you emerge from bankruptcy. If you’re really determined to turn your financial life around, bankruptcy will allow you to have a somewhat fresh start.
  • Depending on your situation and the type of bankruptcy you file, you could retain important assets, such as your home, car or retirement savings.

Cons

  • Your credit score will take a significant hit — anywhere from 100 to 200 points.
  • Bankruptcy will stay on your credit report for either seven or 10 years, which will make it difficult for you to secure new forms of credit during that time.

8. Debt snowflake

If you’re interested in saving money while paying off your debt, consider adding the debt snowflake strategy onto whichever debt repayment plan you choose. Debt snowflake is a supplemental method (often used in conjunction with the debt snowball or the debt avalanche method) that involves saving in small ways each day in order to pay off debt.

For example, let’s say that instead of purchasing your typical $5 morning latte, you opt to make your own coffee. With the debt snowflake strategy, you would immediately put this $5 savings, or “snowflake,” toward one of your outstanding balances.

This strategy is beneficial because you can keep it in place once you’ve paid off your debt. Instead of putting your “snowflakes” toward your debt, you can instead put them toward an emergency savings fund, for example.

Pros

  • It’s a super simple way to make progress toward paying off debt.
  • As you see the dent that your small but meaningful contributions make to your debt, you will likely be motivated to keep going.

Cons

  • It’s not a stand-alone strategy. Because the “snowflakes” are small savings, this strategy should ideally be used in conjunction with another debt repayment plan.
  • The debt snowflake requires both organization and diligence since you have to make a payment toward your debt each and every time you skip a latte or bring your lunch.

Final thoughts

Being in debt can often be all-consuming, with the amount of money you owe always lurking in the back of your mind. Thinking about this number might keep you up at night, or leave you feeling anxious about going out with friends.

Deciding to tackle your debt once and for all will not only give you the financial freedom you crave but also the peace of mind you deserve. And just remember: It doesn’t necessarily matter which debt repayment strategy you choose. What matters most is your dedication to sticking with the plan.

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