How To Get Out Of Debt—A Step-By-Step Guide For The Overwhelmed | Edukasyon.ph
Grown-up Guide

How To Get Out Of Debt—A Step-By-Step Guide For The Overwhelmed

So debt is at your door, and you’re stressed out like crazy! What do you do now? Call for help? Cry? Run away? All of the above? Sure, go for it. But if you’re going to run, make sure you don’t run away from your debt but rather, run into a way out of your debt. 

The trick to staying away from the realm of debt overwhelm? Level-headedness, a solid budget plan, and a few tips—both financial and emotional—that you ought to keep in your pocket at all times. 

That’s what this article’s here for. So keep calm and read on!

Step 1: Clear your environment

Start subscribing to the Marie Kondo school of “spark joy!” and get rid of the unnecessary clutter—and that applies to your spending, too. You’ve probably racked up a high credit card bill or borrowed too much money from too many people because there are too many things to pay for. So what can you get rid of? Any subscriptions or billings you can conserve on or do without?

If you’re already in debt, stop spending unwisely! Avoid malls. Blacklist online shopping sites in the meantime. Get your financial life together before you spend on wants, not needs.

Step 2: Get rid of your credit cards

Gather all your credit cards. Those shiny plastic promises of buy-now-pay-later are your frenemies. If you can’t afford to pay off your debt, you can’t afford to use a card on what you don’t need. Re-evaluate those spending habits of yours. 

Call someone for emotional support. Like your mom—or an authority—you can trust. Have them hold on to your card for safe-keeping. Or chuck it in the freezer a-la Confessions of a Shopaholic. Reconcile with your credit card when you can say for sure that you won’t use it uncontrollably again.

Remove the credit cards from the picture so you can do no further harm. After that, it’s time for damage control. 

Step 3: Go back to basics—Remember your budget!

Alright, here’s the easiest budgeting hack ever. Did you do the 50-30-20 budget, which we talked about in another story? This simple beginner-friendly budget easily helps you understand what you spend the most on and what you can be saving for. 

Now, we did say you have to set aside 20% of your budget for savings and investments. But if you’re currently in debt overwhelm mode, put that into reducing your dues first. There are no legitimate investment plans out there that can give you returns higher than the interest charges on your credit card debts! Needless to say, that 30% budget for wants should also go to debt repayment. (Sorry!)

Step 4: List down all those debts, and remember the emotional as well as technical parts

Writing things down really does put your life into perspective. But to get to peak financial life organization mode, a spreadsheet is best. Keep it simple with the following columns:

  • Name of lender or bank
  • Amount you owe
  • Interest rate
  • Due dates
  • Maturity (how long it will take for you to pay off the debt/loan)
  • Purpose of the loan

Now that you’ve got that down, remind yourself why you took out that loan. Or why you spent so much with that bill. Noting down the purpose of a loan gives you a higher awareness of where you were and what you were feeling then. 

Seeing all of your debts in one sheet also lets you gauge how you’re feeling now that your debts are dragging your savings journey! Was it worth it? Would you do it again? What can you do from now on?

Step 5: Craft your Freedom From Debt plan!

Once you’re done immersing yourself in your debt situation, it’s time to pull yourself out of it. Imagine your dream life—happy and debt-free. In general, there are two ways to get out of debt as popularized by businessman Dave Ramsey: the Avalanche Method and the Snowball Method. Here’s a closer look.

The Avalanche Method

Prioritize your debt sheet from the highest interest rate to lowest. Start paying off the account with the highest interest rate first. Then move on to the one with the next highest interest rate, and so on and so forth.

Pros: You save on interest payments in the long run. Plus, you retire more debt with around the same amount of money compared to the other method.

Cons: It may take longer to feel progress because you’re paying off bigger debts first. 

The Snowball Method

Arrange your debt sheet from the smallest balance to the largest, regardless of the interest rate. Pay off your smallest debts first. Then you move to the next ones until you pay off everything.

Pros: You see quick progress, deleting more debts off your list in a shorter period of time. This can sometimes be the quicker way to get out of debt, and it feels encouraging.

Cons: You will end up paying more money over time because you disregard interest rates. Not retiring the higher interest accounts immediately means you’ll rack up those extra fees.

We get that debt management can be an emotional journey, so pick the situation that fits you best. What will encourage you through the process? If cost-efficiency is your goal, pick the Avalanche Method. If you’re motivated to get out of debt quick at all cost, then pick the Snowball Method.

Step 6: Create a debtline—a schedule for paying off your dues.

You now have a game plan and a list of all the due dates. Start incorporating these dates into your calendar or planning system. The same goes for when you expect to have money coming in, so you can account for income and expenses. At the end of the day, always go back to your budget. 

Create a rotating schedule for paying all your debts. When’s the closest day to payday that you can settle your monthly dues? This way, you won’t have to worry about neglecting your debt or accidentally overspending.

More importantly, manage your emotions and set goals, too! 

One way to help you with debt overwhelm is to keep track of your Total Running Balance. This is the entire amount of debt you’re retiring that depletes over time. Think of it like a goal you’re racing towards, and not just the number of loans you’re ticking off your list. 

And some tips from FQMom herself

Avoid the common mistakes of just paying the minimum required amount on your credit cards, or running away from your lenders. Pay as much as you can taking into account the above steps discussed. 

Contact your creditors and ask them to help you come up with a good repayment scheme. Being outright with them can earn you some concessions. It might also be a good idea to keep your emergency fund even as you prioritize loan repayments. This way, any emergency will not force you to get into another debt.

Most importantly: remember that money problems are not just solved with money alone!

It all starts with understanding your relationship with money. Have you taken the Financial Intelligence Quotient (FQ) test yet? What’s your score? Raise that grade by checking out more of our FQ tips and guides

And for when adulting really gets hard, check out the Grown-up Guide section on the Edukasyon.ph blog!