How You Can Become Debt Free in 2023

Getting out of debt is a worthy goal for 2023, and these steps will help you achieve it.

Carrying debt can be like wading through mud. It drags on your finances and makes it harder to achieve your goals. Debt payments, particularly for high interest debt, can take a significant chunk out of your paycheck that make it even harder to become debt free. But not only is it possible to pay down debt, doing so will make your life easier in the long run.

Here are four steps to take if you want to become debt free in 2023.

1. Make a commitment to become debt free

When people talk about managing money, they often focus on the practical side like making a budget or cutting spending. That is important, but what goes on in our heads matters as well. If you're serious about paying down your debt, make a promise to yourself that this is the year you're going to make it happen.

Think about why you want to pay off your debt and how you will feel when you're debt free. Hold on to those reasons. You might even write them down. If you're about to use your credit card to buy something you don't really need, counter that temptation by reminding yourself of why you are doing this.

2. Work out exactly what you owe

Before you can start to pay off your debt, you need to figure out how much you owe. Write down how much each debt is, how much interest you are paying, and how much your monthly payment is. The list might include credit cards, loans, mortgages, and other outstanding payments.

3. Make as much room as possible in your budget for debt repayments

Now you know what you owe and what your debt costs, work out how much you spend on other things. If you've never tracked your spending before, a budgeting app might help you get started. The idea is to work out what your rent, bills, groceries, etc. cost, and compare it with what you earn.

The bigger the gap between what you earn and what you spend, the quicker you can become debt free. There are two sides to widening the gap: cutting your spending and trying to increase your income. Ideally, you'll look for ways to do both.

You may feel as if you've already dramatically pared back your spending. But revisit your budget and see if you can squeeze any extra savings. That doesn't mean the debt police are here to take away all your fun, it's about a shift in focus and finding ways to enjoy yourself that won't break the bank.

Increasing your income might involve asking for a raise at your current job, or trying to take on extra hours. Side hustles are another popular option. Perhaps you have design skills, are good at writing, or could turn to online tutoring? Or maybe you could bring in some cash by babysitting or pet sitting? If you can score some extra work, put that cash straight toward reducing your debt.

4. Make a plan

The final step is to figure out which strategy might work best for you, and set yourself achievable goals. Here are some of the common approaches you can take:

Debt snowball and debt avalanche

The debt snowball method means tackling the smallest balances first, so you get a psychological boost as you pay each one off. In contrast, a debt avalanche involves focusing on the debt with the highest interest rate -- the one that costs you the most. Both options have their benefits. The important thing is to be realistic about how much you can pay down each month, otherwise you could get discouraged and give up on the whole process.

Debt consolidation

This essentially involves rolling all your debts into one, so you only have to worry about one monthly payment. You may also be able to reduce the amount of interest you pay at the same time. This might involve a balance transfer -- moving credit card debt to a new card, perhaps even one with a 0% interest rate. You'll need to have good credit for this to work. Another debt consolidation route could be to apply for a personal loan and use this to pay off your other balances.

If you opt to consolidate your debt, the danger is that it creates space to borrow even more. You'll have more available credit, meaning you'll be able to go further into debt rather than getting yourself out of it. It takes a lot of self discipline -- you'll still need to set repayment goals and stick to them.

Bottom line

Interest rates are rising, which means it will become even more expensive to carry debt in 2023. Be realistic about what you can achieve. Depending on how much debt you have and how much you earn, it may not be possible to pay everything off in a year. However, you can make a start. The habits you build next year could not only help you become debt free, but also eventually build wealth.