The average Canadian household has over $1.75 in debt for every $1 they make in income.
That is a lot of cash going towards debt repayment every month, and less going towards other financial goals like saving for kids’ education, retirement and so on.
So if you’re serious about getting out of debt as fast as possible, here are 11 smart ways to get started.
How To Get Out Of Debt Fast
1. Create A Budget
One of the first things to do if you want to get out of debt fast is to create a budget.
A monthly budget may be optional for those with little or no debt, but it is a must if you have huge debts and want to pay it down fast.
Why is creating a budget important for those looking to get out of debt? A budget shows where your income is coming from. But more importantly, it gives you an insight into where your money is going.
It will help you identify expense categories where you can cut back, if you need to increase your income and the extra money you will be able to throw at your debts monthly.
I recommend tracking your expenses for the past few months, or the next one or two months, before budgeting. Tracking your expenses before creating a budget will ensure that your budget is realistic.
This can be a quick exercise if you use cards for most of your transactions. Simply download your bank transactions and categorize them.
To start budgeting:
- Use a budget spreadsheet; or
- Sign up for an online tool like Mint
Related: Why You Need A Budget
2. Cut Your Spending
With your budget done, you should have a clearer picture of what you spend your money on – both essential and non-essential.
Essential expenses include items like rent or mortgage payment, utilities, transport, food and groceries, day care, insurance and so on.
Even though they are essential, it is still possible to cut back in some areas. For example, you can reduce your spending on food by shopping smartly and cooking in bulk.
You can renegotiate your insurance rates or shop around for better quotes. And selling an expensive car or a second family car to buy a smaller one should not be off the table.
For most people, housing, food and transportation account for the largest expense. It is over 60 % for the average Canadian family. So any savings in these areas, even 5%, will go a long way in helping you pay down your debt fast.
But you’ll want to go hard and extreme on other discretionary and non-essential expenses. Examples of non-essential expenses include dining out, movies, non-essential clothing, magazines, video games, expensive hobbies, and many other things you don’t need to survive.
Individually, these expenses may be small, but they all add up and can go a long way in putting a dent in your debt. A habit that costs you $25 per week may look immaterial, but that is $1,300 in a year.
Think of what that extra cash can do your debts.
Related Post: How Much Car Can I Afford To Buy? (3 Rules of Thumb)
3. Commit To Paying Extra Each Month
There are 2 benefits to paying more than the minimum payment on your debts
- You’ll pay down your debt faster
- You will end up paying lower interest
To illustrate, consider a credit balance of $7,500 with an annual interest rate of 19.99% and a monthly minimum payment of $225. It will take over 4 years to fully repay the debt, with total interest of about $3,500, if you make only the minimum payment.
Doubling the monthly payment to $450 will reduce the interest to $1,360 and shorten the repayment period to a year and 8 months.
That is a difference of over $2,000 in interest!
So if you’re really serious about getting out of debt quickly, making only the minimum payment is not enough.
4. Create A Debt Repayment Plan
Now that you know how making extra payments can help you get out of debt faster; the next step is to create a debt repayment plan.
You should start by making a list of all your debts. At the minimum, you need to include the following details: the balance outstanding, interest rate, monthly minimum payment, lender and loan type.
Depending on the debt repayment method you want to use, you should sort the debts by the balance or interest rate.
In general, there are 2 debt repayment plans to consider:
- Debt Snowball: where you make extra payments on the loan with the smallest balance
- Debt Avalanche: the extra payment goes to the debt with the highest interest rate. This minimizes the total interest you’ll pay over time, but you may not get the emotional satisfaction of getting rid of a debt as quickly as you would with debt snowball.
With your debts sorted, simply work your way down the list. That is, once you finish paying off the debt at the top of your list, pat yourself on the back and move on to the next debt.
5. Don’t Add To Your Credit Card Debt
This is quite obvious. Not only because credit cards have higher interest rates, but because you should not be taking on additional borrowings when you’re already struggling with debt.
Some people would even suggest cancelling your credit card or freezing them entirely. Perhaps such drastic measures may be necessary if you are neck deep in debts.
What is important, though, is that you’re using credit wisely. Don’t fund an expensive lifestyle with credit cards or any other credit for that matter. Live within your means.
It is okay to use credit cards to pay for some everyday purchases but make sure you pay them off every month.
6. Sell The Stuffs You Don’t Need
One of the quickest ways to jumpstart your debt payoff is by selling off any unused or old items.
Look around the house for items you don’t need that can be sold for cash. Then organize a garage sale or sell them online. There are several websites you can use for this.
Then take the proceeds and put them towards your debt.
7. Earn Extra Money
Every extra cash you make can help with reducing your debts.
There are several ways to make money using your existing skills on freelancing sites like Upwork, Fiverr and the rest. If you have the time and resources, you can even develop a course or training and sell through Podia, Udemy or Teachable.
Learning new skills that you can monetize has never been easier too. There is a wide selection of courses you can take on Udemy.
Also, your current job may be a low hanging fruit. When was the last time you got a raise? Can you ask for one? Or get another job that pays higher.
Thinking of starting a business? Get 15% off the cost of using the Ownr promo code here.
Related: 45 Creative Ways To Save More Money
8. Put Windfalls To Good Use
Tax refunds, bonus, gifts, salary increases and many more one-off or unexpected income should not be treated as windfalls.
Rather, put them to good use towards your debt repayment.
9. Explore Ways To Reduce The Interest Rates On Your Debts
Consider calling your lenders and ask for lower interest rates. Like the example above, interest rates on debts, especially credit cards, can eat into your payments.
Of course, you have a higher chance of getting approved for lower rates if you’ve had an history of prompt payments. But it’s worth giving a try.
10. Consider Balance Transfer
If your efforts to reduce the interest rates on your debts fail, another way to speed up your debt repayment is to consider balance transfers.
You may be able to get an introductory or promotional rate of 0% for up to 12 months. But also keep an eye on what the rate will be after the promotion period.
The best scenario will be getting an offer that has lower interest rates during the promotional period and after.
11. Negotiate Your Bills
You can negotiate several of your bills – from your phone bills to insurance- and put the extra money towards your debt.
If you still have cable, simply cancel them and move to cheaper alternatives.
Also, check your subscriptions and cancel the ones you don’t need or use often. Do you pay for gym memberships but hardly go? Or have subscriptions to Netflix, Disney+ and several other streaming services?
Bottom-line: Do an assessment of your bills and subscriptions and drop what you don’t need.
Benefits Of Getting Out Of Debts
Less Money Stress
Debt is one of the biggest causes of money stress. Getting out of debts will reduce your stress level, financial anxiety and help you take better control of your finances. Check this post on 11 ways to deal with money stress.
Greater control over your income
Paying off your debt quickly gives you better control over your income and what you do with it. With less money going towards debt repayment and interest, you’ll have the option to spend money on the things that you enjoy and save towards your other financial goals.
Debts make it harder to save towards retirement and that means pushing your retirement farther. The earlier you get out of debt, the sooner you can start prioritizing saving for retirement.
Improve Your Credit Score
A lower debt load will have a positive impact on your credit scores and credit report. Your credit utilization will drop, and you’ll be seen as being more responsible with credit by lenders.
Debt reduces your options. Being debt free gives you freedom – The freedom to choose how to spend your income and not worry about making debt payments, freedom to set financial goals and plan for your future.
I hope if you find some of the tips above useful in your debt reduction journey. If there are any other ways you think should be here, let me know in the comments.