How to Pay Off Debt and Stay Debt-Free

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If you're in debt, you obviously want to get out of it. But how?

We've prepared this in-depth guide to help you pay off the nasty debt that's been keeping you awake.

But first, let's take a look at some of the psychology behind why we get into debt in the first place.

The Reasons People Get Into Debt

Before you can get out of debt, you first have to recognize why you're there. Only when you understand what makes debt happen can you begin to reverse those trends and move in the other direction.

The most fundamental reason people get into debt is that they spend more than they earn. The difference is made up with debt.

There are a whole bunch of reasons why this is true, and you'll need to know which apply to you:

  1. You work in a low-income occupation.
  2. You live in a high-cost area.
  3. There are one or two expenses that are eating up a disproportionate amount of your income. Housing, autos and health insurance are three primary examples.
  4. You have too much big debt: housing costs, student loans or even an out-sized car loan.
  5. You're trying to keep up with what you perceive as normal spending patterns in your social orbit.
  6. You have a casual attitude toward the debt that blinds you to the typical outcomes.
  7. The media/marketing culture encourages us to go into debt.
  8. You're addicted to having (or doing) the latest and greatest.
  9. You've convinced yourself you can always “bailout” through debt consolidation.
  10. You never developed a savings habit, which forces you to rely on credit for emergencies and even ordinary cash shortfalls.

If you're deep in debt, it's likely you're dealing with several of these situations. That will require a multi-pronged strategy to overcome. We'll look at each, one at a time. But first, let's create the incentive to make it happen.

The Many Benefits of Being Debt Free

If you're deep in debt, getting out will be a long-term process. It will help you maintain the effort if you keep the benefits of being debt free prominently displayed in your life.

Some of those benefits include:

  • Gaining more control over your income.
  • Ending the “robbing Peter to pay Paul” budget cycle.
  • Eliminating the stress the comes with debt.
  • Being able to buy what you truly want without the debt that causes you to feel guilty.
  • Having a stronger financial foundation to be able to quit your job or start a business.
  • Being able to begin investing for long-term financial security.
  • Being free to live your life without being weighed down by paying for past obligations.

With these benefits at the front of your mind, let's get onto debt payoff strategies.

Increase Your Income

Increase Your Income addresses Item #1 from the list above. It's an unfortunate state of affairs that a lot of people are stuck in low-income occupations since the Financial Meltdown. This is true even of millions of college graduates. It's not an easy situation to fix, but you must address it if you're deep in debt. Simply put, if your income isn't sufficient to pay your obligations, you'll have to increase in some way.

After all, you can cut expenses only so much.

The first, best strategy is to try to increase your earnings where you already work. That can include working toward a promotion, taking on new responsibilities, learning new skills or participating in any bonus opportunities that your office offers. If there's no chance of increasing your income where you work, you may have to consider looking for a better-paying job.

Alternatively, you can either get a part-time job or start a side business to earn extra money. Naturally, it's tough to juggle two jobs at the same time. But if you can set your debt payoff goals at the front of your mind and recognize that the situation is only temporary, it may help you get through it.

If you do get a part-time job or start a side business, it's critically important that any extra income is dedicated specifically toward debt payoff only. If you blend the extra income into your regular budget, you'll get yourself deeper into the hole but be living a more stressful life.

Cut Your Basic Cost of Living

This section addresses Items 2 and 3 from the list above. There's a lot of advice floating around the web and in the financial media recommending that you clip coupons and eliminate $4 lattes. While that advice is well intended, it won't work if you have a severe debt problem. You'll be cutting pennies when you need to be cutting dollars.

If you're deep in debt, there's generally no alternative to cutting your basic cost of living. That means looking at all your primary living expenses: housing, transportation, and healthcare.

Strategies to implement:

  • If you're living in a high-cost area, seriously consider moving to a low-cost area. It's a tough decision, but high-cost areas only become more so over time. So you may be fighting a losing battle by trying to stay where you are.
  • For housing, consider moving to a less expensive place or taking in a boarder or roommate to help pay the rent or mortgage.
  • If you have a high car payment, replace your car with one with a lower monthly payment or one you can buy without a loan. If you live in an urban area, it may be possible to live entirely without a car; you could rely on rideshare services. Or consider jointly owning a car with a friend or family member; it's actually becoming a trend among Millennials.
  • If health insurance is a problem, as it is for many people, there aren't too many options available. Usually, the best option is to go with the highest deductible and lowest premium. You'll likely save only a little by going this route, but every little bit helps.

If you're seriously deep in debt, the only reasonable strategy is to begin to reduce your biggest expenses radically. That will free up more income than all the coupons you will ever clip or lattes you may pass on buying.

Lower Your Major Debts

This relates to Item #4. If you already have big debts, you may have to find a way to reorganize them, since there's probably no way to pay them off quickly.

Try these strategies:

Secured loans. If you have assets that have large loans attached to them, like a house or car, you may need to seriously consider selling them, paying off the debt and finding something less expensive. It certainly won't be easy, but it will lower your expenses quickly and substantially.

Student loans are tough. For private loans, look to refinance them at lower rates. You might consider extending the term to lower the monthly payment. That would improve your cash flow, but it will take longer to pay off those debts completely.

For federal loans, you can do a Direct Consolidation Loan but not an actual refinance. That's rolling all your loans into one with one monthly payment. Again, you can extend the term to reduce the payment, but it will take longer to pay off.

Also look into an income driven repayment plan to lower your payment. Or even go for a Public Service Loan Forgiveness program, which can lower your payment and lead to debt forgiveness in 10 years of employment with a government agency or charitable organization.

Adjust Your “Debt Attitude”

This covers Items 5, 6, 7 and 8 from the list above. What makes them unique from the other reasons people get into debt is that they're completely within your control. They have to do with your attitude toward consumption and even toward debt. If you can get these under control, it's probably the best way to “stop the bleeding” that leads to more debt.

Stop trying to “fit in.” Extraneous consumption is usually driven by a need to keep up with your peers. For example, if two friends buy new cars, you do the same. You may not be able to afford it comfortably, but you do it anyway. Or maybe you have friends who travel extensively. That's fine if you have the budget to keep up. But if you don't, you'll have to either bow out or even consider finding new friends.

Stop seeing debt as your friend. In a real way, debt has replaced money as a medium of exchange. It's very common to borrow money to pay for anything that costs more than a couple hundred dollars. Easy-to-qualify financing and credit cards make it easy to fall into this trap. If you focus primarily on what credit will buy, rather than the obligation it will create, you're caught in the debt Catch-22.

You'll have to seriously explore the darker side of debt, including the impact it's already having on your budget and your life. If you can come to see debt as undesirable or even evil, you'll be much less likely to take on more of it.

Tune out of the media. Do you think TV is really about the programs? It's not. It's about the commercials. That's where the money changes hands in the TV universe. The commercials get you to buy things you probably wouldn't then give part of the money to the TV networks as advertising revenue. The less time you spend watching TV or even on the internet, the easier it will be to resist buying what you probably can't afford.

Divorce yourself from the cutting edge. If you believe you need the latest iteration of a mobile device or some other gadget, get out of that habit quickly. Not only does chasing the latest and greatest force you to spend money you don't need to, but early adopters pay more for what they buy, for the privilege of being first in line. It's an expensive addiction.

The Debt Consolidation Trap

This is Item #9 on the list above. At least part of the benign attitude people have toward debt has to do with the ability to consolidate. Many debtors even become serial debt consolidators.

Debt consolidation can work if it lowers your total monthly payment and you don't take on any more debt until it's fully paid off.

But in the real world, people consolidate their existing debts, then continue to borrow more money. They hope to repeat the cycle later with yet another debt consolidation loan.

This is a situation I witnessed countless times in the mortgage business. Much of the consolidated debt ended up on either a new first mortgage or a home equity line of credit. This is a significant reason millions of people lost their homes during the foreclosure crisis.

Recognize that debt consolidation does not reduce your debt load. It just rearranges it into a more affordable package. If you're going to do debt consolidation, be sure to swear off taking on any more debt. That way, you'll give the debt consolidation loan a chance to do what it should be intended for.

Converting From Debtor to Saver

This addresses Item #10, and it may be the most important of all. Becoming a saver is how you reduce your dependence on credit. There's a strong correlation between people who have excessive debt and a lack of savings. The absence of savings forces a reliance on credit for whatever your paycheck won't cover.

To get absolutely out of debt, you'll need to reverse that arrangement. By building savings, even saving your spare change, you won't need to rely on credit. You can start today with Acorns, for example.

It may even be necessary to begin building up a savings account before paying off your debts (we recommend CIT Bank). With additional cash flow from either increasing your income or decreasing your expenses, you create a line item in your budget for savings. “Pay” regular monthly amounts into your savings account, as if you were paying a loan. Do that for a few months, and you'll begin building a cushion that will enable you to break your reliance on debt.

Once you have a savings cushion — sufficient to cover at least 30 days of living expenses — then begin attacking your debts, one at a time. One strategy is Dave Ramsey's “debt snowball.”

The strategy involves paying off your smallest debt first. It'll be the fastest and easiest debt to pay off. That will give you the confidence to go after the next lowest debt. And with the smallest debt paid off, you'll have a little bit of extra room in your budget to pay off the next smallest debt.

You go from smallest to largest until you pay out all of your debts. And once they are, never go back. It'll be time to start investing your money.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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