How to Get Out of Debt in 5 Simple Steps

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Debt truly is the worst four-letter word in the financial world. Once you get into debt, it can constantly hang over your life, causing constant anxiety. But debt doesn't have to dominate your life. To help show you how to get out of debt, I've put together five simple things you can do to start paying off what you owe, and get yourself on the path to financial independence.

1. Figure out what you really owe.
Many people think of debt in terms of how much they have to pay to cover their minimum payments every month. But to get a true handle on your debt, you have to know how much you owe in total.

Make a list of all your debts, with the total outstanding, minimum payments, and current interest rates. You'll use that list in future steps as a guide to deciding how to get your debt paid off.

2. Find savings wherever you can.
In tough times, the hardest thing to do is find ways to cut your costs in order to save more. But whether it's clipping coupons, cutting back on unnecessary expenses, or picking up extra work on the side, dedicating every spare dollar in your budget toward reducing your debt will get you out of debt as fast as possible.

3. Apply any extra money toward paying down your highest-rate debt.
Once you've found that savings, go back to your list of debts and figure out which ones carry the highest interest rates. For most people, credit card debt will rise to the top of the list, as card-issuing banks Bank of America, JPMorgan Chase (NYSE: JPM  ) , and Citigroup have many cards that charge double-digit interest rates right now. Banks count on those sky-high interest rates to help finance delinquent accounts and earn substantial profits, but that doesn't mean you should pay them any longer than you have to. If you can double your monthly payments on just a single card, you'll chop off well over half the time it'll take you to get that card paid off.

4. When you've paid off one debt, apply that money to your next-highest-rate debt.
Getting that first card paid off can be slow going, but the nice thing about this strategy is that when you're done paying that card off, you'll have more money to pay down other debts. Once you're done getting rid of all your credit card debt, you'll likely move on to high-rate student loan debt, car payments, and eventually, lower-rate student loans and mortgage debt.

5. Once you're done, don't stop saving.
When your debt is all gone, start paying yourself. Since you've gotten used to setting that money aside to get out of debt, you shouldn't miss it when you start investing it toward savings goals, such as having a rainy-day fund, building up a down payment for a home, or saving for long-term needs like retirement. Doing so will get you ahead and prevent you from falling back down the debt spiral at the first sign of financial difficulties in the future.

Get started today
As simple as these steps are, it can take years to get through them and eliminate your debt entirely. The key, though, is staying confident that you have a plan, and that you do know how to get out of debt in the long run. Having that confidence will help you get through the inevitable tough times, and stay on course to a much more prosperous financial future.

Investing in the banks that reaped the benefits of your debt can be an excellent turnabout-investing opportunity. Find out more about whether JPMorgan is worth buying in your investment portfolio by checking out The Motley Fool's premium research report on the company. Click here now for instant access!

Read/Post Comments (6) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2013, at 8:43 AM, BMFPitt wrote:

    Step 0: Don't get into debt unless you really have to or it saves you money.

  • Report this Comment On May 07, 2013, at 8:11 PM, Tomohawk52 wrote:

    People tend to try to solve problems by purchasing the most obvious solution. The most obvious solution is generally relatively expensive. An example: you want a means to get to work. Many people start thinking about buying a car.

    You could instead, possibly:

    - Take the bus

    - Walk/ride a bike

    - Lease a car

    - Rideshare

    - Telecommute

    - Move closer to your job

    Basically the question shouldn't be "what can I buy to get to work?" but rather "what various ways can I get to work?" then do cost/benefit analyses on them.

  • Report this Comment On May 07, 2013, at 8:24 PM, GordonsGecko wrote:

    Completely assinine. Tell people they need to get out of debt and then offer up your premium research report on JP Morgan.

    If these people need to get out of debt, then the last thing they should be doing is investing.

  • Report this Comment On May 08, 2013, at 2:53 AM, badnicolez wrote:

    6. Pay off secured debt first, such as student and auto loans. That way if you run into trouble, you can (as a last resort) walk away from the unsecured debt.

  • Report this Comment On May 09, 2013, at 8:08 PM, ValuePicksOnly wrote:

    @GordonsGecko: While I agree that the JP Morgan report is a bit out of place, I completely disagree with your point about investing. Acquiring assets which generate money is a good idea in any situation and can only help them pay off their debt faster.

  • Report this Comment On May 15, 2013, at 6:39 PM, mbushman wrote:

    The one thing I might add, or at least suggest is worthy of consideration, comes in response to "Once you're done, don't stop saving."

    I suggest that one might be wise to stop shedding debt BEFORE one's debt is gone.

    With 30 year mortgage rates sitting around 3.5%, and the (IMO ridiculous, but hey, it's there) tax benefit of mortgage debt dropping that further, to perhaps an effective 3%, it is not necessarily the smartest move to be in a rush to pay that off.

    For me, I would be happy to borrow pretty much as much as I could (OK, let's say up to say 50% of my net worth?) if I could get it at an after tax cost of 3%, for 30 years. I have a high enough degree of confidence in my ability to beat that benchmark over that time frame to be willing to take the risk.

    Use the money to go on a vacation to Aruba? Ahhhh, no. But perhaps consider not paying off the house and instead putting the money to work in a decent Large Cap Dividend Growth Fund? Yeah, maybe.


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