How To Actually Break Free From Debt (A Step By Step Guide)

The average American accumulates multiple kinds of debt in their lifetime. We take out loans to go to college, buy a car, and buy a house. We use credit cards to buy things now or to carry us from paycheck to paycheck. And we shoulder that debt through life. In fact, 73% of Americans are likely to die still in debt.

The student loan debt situation alone is fairly staggering. Out of the general student population, 71% will graduate with debt. The average owed by a 2017 college graduate is $28,650, and the average American household owes $46,822 in student loans. More than 45 million American borrowers collectively owe more than $1.5 trillion. 

 Credit card debt is another problem. The household credit card debt average is $6,849, making the total owed in the U.S. 444 billion. Add mortgages and car loans on top of that where the household averages are $189,586 and $27,804 respectively. This means that the average American household is over $270,000 in debt! 

The average American household is over $270,000 in debt! 

Debt Impacts Health

According to an American Psychological Association study, 72% of Americans reported money stressed them out. And 22% reported the stress was “extreme.” Multiple studies have shown the negative health consequences connected with having debt: depression, higher blood pressure, migraines, muscle tension, back pain, ulcers, indigestion, and heart problems. 

It Starts with Your Mindset

The first step to getting out of debt is a mental one. Allowing yourself to get into debt came with a certain mindset. Now you’ll need a new perspective to help motivate you to get out of debt. You’ll need to reflect on your “invisible scripts” about money. An invisible script is a belief that is so deeply and closely held that it’s invisible. These invisible scripts guide your decisions and feelings. Some invisible scripts that may have allowed you to get into debt might be “Debt is a normal part of life” or “I can pay the minimum payment on my credit card, so no big deal” or “I ignore money problems because they’re too stressful to think about.” To break free of debt, you’ll need to analyze what invisible scripts are holding you down, and rewrite them into mantras you can use to coach yourself.

You’ll also need to look at our culture with crystal clear vision. We live in a consumer culture. Media is driven by advertising dollars. Think about how many ads you see on TV, Facebook, and Instagram. We’re hit with images of tempting things on one side and the cultural voice of instant gratification on the other. We want to buy that pretty purse or that seasonal latte, but do we need it? Changing your mindset to prioritize your needs instead of your wants will be immensely impactful.

Changing your mindset to prioritize your needs instead of your wants will be immensely impactful.

In moments of temptation, you can think of financial expert Dave Ramsey’s signature phrase, “If you will live like no one else, later you can live like no one else.” Or remind yourself of this lesson that my mom taught my preschool-aged brothers: “Those commercials are just tricks to take your money.”

It will also be helpful to understand the credit card companies’ mentality. They want you to spend more because that’s how they make their money (from card fees, transaction fees, and interest). Their goal is to make the spending process as painless and as convenient for you as possible.  So remember, that piece of plastic is designed to make you spend more.

And lastly, but certainly not least, you will have to courageously stand up to peer pressure. It will be difficult and embarrassing to excuse yourself from eating out or going to the movie theater (perhaps for a long time). Prepare an explanation and practice saying it out loud to make that awkward conversation a little less so. 

Another method to help you overcome some of the pain and awkwardness of getting out of debt is to motivate yourself with your dreams of life beyond debt. Ramit Sethi, author of I Will Teach You To Be Rich, recommends starting from a place of “yes”: Ask yourself, what do you love to spend money on? What would you do if you could quadruple the amount of money you spend on that thing? Don’t just say, “I want to get out of debt.” Dream about what you want to be able to do AFTER you get out of debt, and that will help motivate you. 

What You Can Do To Get out of Debt Faster

Make a budget and give every dollar a job. Budgeting is practically and mentally beneficial. You will feel more in control knowing exactly where every dollar is going, and you will have a purposeful and intentional plan for every dollar. Start with the finite numbers of your income, and attribute specific amounts to each category of your needs, as well as how much you can give to charity that month and how much you can save. Plan for normal but irregular expenses: replacing car tires, buying Christmas gifts, car registration/renewal, etc. Save some each month in your budget for these expenses. You can use a budgeting software such as Mint or You Need A Budget to help you organize and track your expenses.

Remember, this is a new skill you’re learning, so have patience with yourself! It’s normal to have to adjust your budget as you go. 

Dream about what you want to be able to do AFTER you get out of debt, and that will help motivate you. 

Set up an emergency fund. Several personal finance gurus recommend putting $1,000 in a separate emergency fund as quickly as possible. This is so that if an emergency does occur while you’re paying off your debt, you don’t have to go into more debt. But be VERY careful it only gets used for REAL emergencies (like you broke an arm or your car got totaled or you lost your job).

Use the snowball effect. The snowball effect is a method for paying off debt in which you tackle the smallest debt first. You put as much money as you can towards that debt, while continuing to pay the minimum payments on others. Once the first debt is paid off, the money freed up now goes into paying the next smallest debt, and so on. As you proceed in wiping out debt, the amount going to the current payment will increase. Another method for paying off debt is to tackle the highest interest ones first (to save money on interest).  

Pay more than the minimum payment. When you’re paying down debt, you're paying both the principal and the interest. If you pay more than the minimum for that month, you’re chipping away at the principal, which will save you money on interest in the long term. (You should double check with whomever you’re paying that the extra is indeed being applied to the principal.) 

Put “extra” money towards your debt. Remember the excitement of finding cash in the laundry when you were a kid? It doesn’t change much as adults! But now some of our other kinds of “free” money are Christmas bonuses and tax refunds. Put that “extra” money towards your debt. 

One way to inject more income into your budget is to make more money.

Negotiate for a raise. One way to inject more income into your budget is to make more money. You can access Ramit Sethi’s free resources in which he teaches you how to negotiate for a raise: “Ramit’s Ultimate Guide To Getting A Raise.”

Get a second job. Another way to make more money is to get a second job. It’s not glamorous or convenient, but if you’re determined to get out of debt as quickly as possible, it will be worth it.

Get credit card savvy. Using credit cards when trying to get out of debt is a point of contention among financial advisers. Dave Ramsey is a proponent of cutting them up, while Ramit Sethi thinks they’re an essential part of modern life. The heart of the matter is your level of self-control. If you can’t stop swiping the plastic, you’ll be better off getting rid of your credit cards completely. But if you have the ability to treat your credit card like a debit card, it’s worth keeping (credit cards offer protection from theft, as well as reward you with points). Another option is American Express’s charge card, which is basically a credit card that you are required to pay off every month.   

Use a cash envelope system. The alternative to credit cards is the cash envelope system. Look at your budget and make an envelope for each category you will need for the month (like groceries, gas, clothing, etc.) Put the budgeted amount in cash in the envelope and use it for shopping. Paying in cash has a variety of effects. One is that paying in cash hurts. But when we pay in cash, we value our purchase more. Secondly, seeing the literal physical limitations of our spending (a finite number of dollar bills in our hands) makes us shop more judiciously. 

Paying in cash hurts, but when we pay in cash, we value our purchase more.

Automate your money. You can avoid late fees for bills or prevent yourself from spending money you wanted to save by setting up automatic payments or transfers. Deposit all your income into one checking account, and arrange for money to be moved from there into other accounts for savings or for specific spending (like Christmas gifts or car upkeep). 

Sell what you don’t need. Make like Marie Kondo and purge! Sell items you don’t use or need. This could be everything from cookbooks, to clothes, to the car.

Live thriftily. Find cheaper ways to live: buy used instead of new, use coupons, shop sales, use Groupon, find free local entertainment, use Redbox or the library instead of going to the movies, don’t eat out, meal plan so food isn’t wasted, give inexpensive gifts, go without, etc. Click here for more ideas.

Closing Thoughts

So many things in life are outside our control, but you don’t have to feel like your finances are one of them. Take control of your finances and you will take control of your freedom and your future. 

More Resources:

Dave Ramsey: Total Money Makeover book and Financial Peace University program

Ramit Sethi: I Will Teach You To Get Rich book and free online resources

Jesse Mecham: You Need a Budget book and free online workshops