How to Realistically Get Out of Debt

Debt is never an easy topic to discuss, and certainly isn’t something anyone who is struggling with it brings up or is willing or proud to talk about, no matter who the person on the other end of the conversation is.

To make matters worse, debt affects a good portion of people in different forms and fashion, whether that’s credit cards and unsecured debt, school loans, multiple car leases or loans and even overspending on the house you live in.

Nearly one-third of Americans have what you’d consider bad or poor credit, roughly around the 600 mark.^[1]

Having poor credit often is a reflection of more than just paying late on credit cards or defaulting on a loan.

Bad credit is related to credit and the woes that come with debt when you simply have too much money owed in relationship to the amount of money you have available on credit cards and how your income affects that overall (i.e. debt to income ratio).

A good debt to income ratio is around 35 percent, meaning that your debt is about one third of what you make but no more.^[2]

The debt to income ratio discussion also has an important factor as well: the income is pre tax versus what you’re spending on debt, and some debt or “expenses” that aren’t figured into what you’re paying every month include cable, internet, phone, groceries, living expenses and memberships, as examples.

So if you’re someone at a debt to income ratio of 50 percent, you’re probably running a break-even operation that is your budget, failing to save money and falling further into debt as a result.

Consider that if you’re paying $1,000 for rent or a mortgage, another $500 for a car and a credit card bill of $200 per month but you’re only making $3,000 gross from one month to the next, your debt to income ratio is actually more than 50 percent.

Chances are, you’re not saving and actually taking on more debt.

You can argue that good debt and bad debt are two separate entities, and with that you’d be fairly accurate. The former resides more on school loans, mortgages and other investments that are justified. Bad debt is more about unsecured debt, taking on and borrowing with nothing to show for it.

That said, “good debt” still can be underscored with bad decisions, such as buying a house you can’t afford.

What’s even more alarming about debt is that it’s not going away, but instead on a rise. Take the number from 2016 to 2017, up on credit card debt nearly 3 percent with Americans owing 905 billion dollars in credit card debt, with a little more than $7,000 in credit card debt per household.^[3]

What makes debt that much more daunting when you have it is the idea of trying to get ahead.

That is never an easy thought, given that no one really has $7,000 lying around (and some statistics suggest that the household debt is as high as $20,000). If you had that kind of cash on hand, the debt initially wouldn’t have been an issue.

Much the same way a person tries to understand the idea of losing 100 pounds or more, the confusion that abounds, is similar to that of someone in debt.

You hear about different avenues to take, but are any of them truly viable?

Pay double on your credit cards every month.

Try a consolidation company.

File for bankruptcy or talk to a financial planner.

Get a second or third job for more income.

While all of those are talking points and ideas, you have to wrap your mind around getting out of debt realistically, and being patient with the process, more than anything else.

Nearly 30 percent of people in the United States are always (not sometimes or when it’s time pay bills, but every second of every day) worried about money.^[4]

That stress weighs heavy on not just trying to figure out how to pay your debts but also performance at work, family time and just simply enjoying your life.

Getting out of debt can be an endeavor that is rooted in simple, smart decisions with a road to nowhere suddenly paved with purpose and poise.

Here’s how you can rid yourself of debt, minus the gimmicks:

Wanted Man: Truly understand the difference between wants and needs

Sometimes, tackling debt is about answering the hard questions and making even more trying decisions.

Do you really need to spend hundreds of dollars on premium cable packages?

Is that additional restaurant or dining out experience necessary? Are you doing your best to shop around for better pricing?

Often times, your path to paying down debt is simply rooted in having more money, and that can be done, truthfully, with more income but also taking what you’re making now and stretching it further by eliminating expenses.

Cable and satellite providers are an easy, albeit pricey, target.

The average cable bill is $80 per month, with satellite prices being closer to or over $100.^[5]

The term “cutting the cord” is popular and appropriate given lower cost options that are available and also your need to break free from expenses that you truly have control over from one month to the next.

Dining out versus eating at home is a conversation that can lead to the former costing far more than the latter.

A study from 2016 showed the cost of food that is made at home was down about a half percent, while eating out at restaurants was up nearly three percent (2.7 percent); one example was a rotisserie chicken and vegetables at $12.95 at your favorite restaurant costs about $6 at home.^[6]

And expenses also come in the form of the routine, too.

Whether you’re an avid smoker, love to drink coffee every day or always have to have a $2 bottle of water by your side, you’re undoubtedly spending without even thinking about it.

The average smoker spend $9,200 per year.^[7]

If you think about the $7,000 of credit card debt you have, quitting might sound pretty lucrative.

Divide and Conquer: Should you consolidate or pay debt off on your own?

One of the questions that abounds more than any other is paying off debt, and how to properly do it?

That’s almost always a polarizing question just due to the fact that so many different thoughts and opinions are out there for consumption.

Debt consolidation makes sense if you’re truly taking out a personal or consolidation loan to pay off your debt in full, your utilization rate will be better and your score could increase but only if you leave the credit cards with the zero balance open (showing more available credit).

Practically, you can make one payment and typically a consolidation loan allows for a lower interest rate, which means you’ll save money, too.

Others forms of paying off debt are systematic, and focus on two schools of thought: pay the lower amounts off first and work your way up to the larger sums or focus on those credit cards or loans with higher interest rates first.

The first example, also known as the snowball method, means that you pay the minimum on all your cards except the one with the lowest balance. You pay double on that or more than just the minimum. Once that amount is paid off, you take the entire dollar figure you’re already paying on the previously lowest bill you have and apply it to the second-largest loan, while continuing to pay the minimum of everything else.

In any event, the idea of success is predicated on one important factor: when you have a plan to pay off debt or you’re consolidating, make sure you don’t continue to use the cards that have a zero balance (if you’ve consolidated) or you’re paying off one at a time through the snowball method.

Budget or go broke: If you’re not tracking, you’ll never lose battle with debt

Another buzz word that is associated with debt is budgeting, and if you aren’t of the opinion that you need one, you’re wrong.

Look no further than the total debt numbers by age groups. Roughly 80 percent of the Baby Boomers are in debt, with that same total for Gen Xers and 81 percent of millennials currently carrying debt.^[8]

The problem with all that debt and the woes that come with it is that not enough people in general develop and use a budget.

Only about 40 percent of people budget.^[9]

And while it’s easy to look at a budget and cut expenses, as previously called upon or pay off your debt smarter, you also have to look at how your budget is allocated as far as expenses go, even the ones that are necessary evils.

If you’re spending more than 30 percent of your budget on your home, that’s high. Reports indicate that they number is, on average, about 37 percent.^[10]

Most agree that you should spend 50 percent of your income on essentials or “needs”, and if you’re already spending nearly 40 percent on just a mortgage or your housing, that leaves 10 percent for the rest of what you’d consider needs, which hardly is anything.

To truly budget with purposes means paying attention to every last dollar, making sure you are allotting at minimum 10 percent toward a savings account and tackling debt as well, even if that means taking the 10 percent and making it 5 to have more leftover.

And as long as we’re talking leftovers, any budget that is going to be successful has to have money leftover after you pay your bills, otherwise it’s futility at its finest.

Debt looms large, and that’s understandable.

Even worse are the huge numbers and time periods that are associated with paying off debt.

If the average card holder has credit card debt in the neighborhood of $15,000 and the average interest is around 17 percent.^[11]

That example means you’ll have to pay on that card and have it paid off in just under 11 years.

Think of that: more than a decade just to pay off debt.

And in some cases that’s just one credit card (or two).

You also have to consider debt that is your car, truck, house and other loans you’ve taken.

Even though at the moment it’s hard to believe, you can build a savings account, secure financial freedom and push back against the debt that is causing all those awkward conversations.

Once you get a handle on it, develop a better plan, you’ll be quick to talk about how you did it, rather than avoiding the topic altogether.