How to get out of debt

For you to achieve financial independence, you need to maximise the resources you have. And that means getting out of debt is your first order of business.

Getting out of debt can seem complicated and overwhelming, but it is possible with the right plan and mindset. Here are some steps you can take to get out of debt and regain control of your finances:

1. The first step in getting out of debt is to create a budget. This will help you see where your money is going and where you can make changes to reduce your expenses. To make a budget, start by listing your income, including your salary, any bonuses, and any other sources of income. Next, list your expenses, including rent or mortgage, utilities, transportation, food, and entertainment. Subtract your expenses from your income to see if you have any money left over. If you don’t, you’ll need to find ways to reduce your costs. (see: Basic Budgeting)

2. Prioritize your debts: Once you have a budget, it’s essential to prioritise your debts. Start by paying off the debts with the highest interest rates first. These are often credit card debts, with interest rates as high as 20% or more. Paying off these debts first will save you a lot of money in the long run. Once you’ve paid off the high-interest debts, you can focus on the lower-interest obligations. Generally, I encourage people to pay off their lowest debt first (which is often a credit card). Put as many resources as possible towards eliminating that debt, then move on to the next smallest. As you eliminate the smaller debts, you will have more resources to apply to your higher debts. This process does not include your home loan if you have one.

3. Increase your income: To get out of debt faster, you may need to increase your revenue. This can be done by getting a higher-paying job, starting a side business, or renting a room in your home. Any extra money you make can be used to pay off your debts.

4. Cut back on expenses: One of the easiest ways to free up money to pay off your debts is to cut back on your costs. This can be done by making small changes like cutting back on eating out, buying cheaper brands, or cancelling subscriptions. You may also reduce expenses by consolidating your bills by combining your cable, internet, and phone bills.

5. Seek help if you need it: If you’re finding it difficult to get out of debt on your own, don’t be afraid to seek help. Many organisations can provide you with free financial counselling and advice. In Australia, financial counsellors are just a phone call away. For example, the National Debt Hotline is 1-800-007 007.

6. Avoid new debt: Once you’ve started paying off your debts, it’s essential to avoid taking on new debt. This means not using your credit cards, taking out loans, or using other forms of credit such as BNPL. Instead, focus on living within your means and building up an emergency fund to handle unexpected expenses without going into debt.

7. Be patient and persistent: Getting out of debt does not happen overnight. It takes time, patience, and persistence. It may sometimes be frustrating, but stay focused on your goals and remember why you’re doing this. You’ll be debt-free before you know it. The sense of relief you will feel will be worth it.

Here are a few additional tips that may be helpful:

• Look for other ways to increase your income: selling unwanted items around your home or freelancing to bring in extra money.

• Consolidating your debts into one monthly payment can make managing your costs easier, and prices lower your interest rate. But it would be best if you focused on eliminating the deficit as quickly as possible.

• It's essential to be realistic about how much debt you can pay off each month and how long it will take you to become debt-free. Set realistic goals and work towards them.

• Avoid lifestyle inflation: As your income increases, it can be easy to start spending more money on things you don't need. Avoid this by sticking to your budget and being mindful of your spending habits. Make any extra money coming in work extra hard by applying it to your debts or investing it in a savings account or micro-investing app.

• Get support: Surround yourself with people who support your goal of becoming debt-free. This can include friends and family or a financial coach or counsellor.

• Set up automatic payments for your bills, so you never miss a payment. For example, align your bills with your payday to automate regular payments and never receive bills. This process is outlined in detail in my book "Navigating Money, Markets and Men."

• Review your progress regularly, and adjust your plan as needed. This will help you stay on track and motivated.

Getting out of debt requires creating a budget, prioritising your debts, finding ways to increase your income, cutting back on expenses, seeking help if needed, avoiding new debt and being patient and persistent. It is not easy, but with the right mindset and plan, it is possible to regain control of your finances and become debt-free. Remember to stay focused on your goals, and don’t be afraid to seek help if you need it. With determination and discipline, you can get out of debt and enjoy the financial freedom you deserve.