How to Become Debt Free - SmartAsset

Getting out of debt is one of the best financial goals you can set for yourself. From a purely mental standpoint, no matter what kind of bills you’re paying, it’s a huge relief to have any kind of debt taken care of. From a financial standpoint, it’s even better. Eliminating debt gives you the freedom to make forward-looking investments rather than backward-looking spending. Yes, that car or degree has value, but once you’ve paid it off you can start planning for the next big thing rather than paying for the last big thing. Becoming debt free isn’t easy but here are some of the best ways you can start to do just that. You can also work with a financial advisor to help you make a long-term financial plan.

1. Make a Balanced Plan

First things first, make sure you approach this with a sense of balance. Getting out of debt is like losing weight. It’s okay to push the envelope in short bursts. If you’re just trying to lose those last five pounds or pay off that last credit card, then sure. Get aggressive for a few weeks.

Most of your work here will be long-term though, in terms of months or years. In that case, you need to approach this sustainably. In the same way that going on, a crash diet will usually fail, depriving yourself of all joy will just lead you to abandon the debt project eventually.

Instead, make a balanced plan for getting out of debt. Leave yourself some money to see a movie, have a beer with friends or make a nice dinner from time to time. It may seem counterintuitive, but a little bit of luxury spending in the short run will help make sure you stay on track overall.

2. Always Pay Off Interest

Whether you have a mortgage, a credit card or a student loan, just about all debt applies and compounds interest in its own way. It’s important to understand how this works for every loan you have open because not understanding the mechanics of interest is how you get surprisingly large bills. It’s also important to pay that interest off if at all possible.

Regardless of your minimum payments, pay the interest in full for every billing cycle on every loan you have. If your minimum payments cover this, then great. For many products, however, they may not (credit cards may be the most significant example of this). Learn when your interest compounds onto the principal amount and make these payments before that happens. This will keep your debt from increasing while you’re busy paying it off.

3. Try the High-Interest Snowball Method

Perhaps the most popular method of paying off debt is called the “snowball” method. This is a relatively fancy name for focusing all of your money on paying off one account at a time while making minimum payments on all the others.

This lets you clear each debt faster, so you can then dedicate more and more money toward paying off the next loan as you clear each last one. Arguably the best way to snowball debt is by focusing on high-interest loans first. This is the debt that will grow the fastest, so it’s the debt that will cost you the most money.

So with this approach, you identify your highest-interest loan. For most people, this will likely be a credit card. Make minimum payments on all your other debt while you dedicate all available funds toward paying off this account. Once that has been paid, move on to the next-highest-interest loan and so on. This way, you save yourself the most money in interest payments over time.

4. Consider the Low-Balance Snowball Method

Another snowball approach is to focus on paying off your accounts with the lowest balance. This is a good approach if you have relatively low-balance accounts that you can pay off quickly. It’s also a particularly good approach if you have accounts with flat fees attached.

By paying off small accounts quickly you can give yourself a sense of accomplishment. You can also free up those minimum payments for paying other debt and can save money on any applicable flat fees.

Just, be careful about prioritizing low-balance accounts over high-interest ones. If it’s still going to take you a while to pay off this account, you might want to prioritize your most expensive debts first. They’ll take longer to pay off but will save you more money in the long run.

5. Make Small, Mid-Cycle Payments

To get out of debt you’ll need a plan. Throwing money at this when you get around to it won’t work any more than just vowing to sort of be better about snack foods will help you cut weight. You need to make a budget, set aside the money for your debt payments and stick to it. That said, it’s worth building good habits too.

Once you have that plan in place, that’s when you should find room for random, mid-cycle debt payments. Whenever you have some spare money, throw it at the credit card or mortgage. Yes, it’s only $20 here and $30 there, but those small payments add up. What’s more, you’ll build a personal culture of prioritizing debt that will help you keep good habits in the long run.

Small, mid-cycle payments don’t replace having a plan for managing your debt. They are a fantastic supplement, however.

6. Refinance and Transfer Balances

Managing your interest really is a very important part of handling your debt. To see this in action, just look at the amortization schedule for a mortgage. It can take decades before you’re paying more money on the principal than the interest. This is why it matters that most debt has ways to reduce your interest.

If you have a structured loan, like a mortgage or car payments, you may be able to refinance at a lower rate. If you have a credit card, a balance transfer might let you start over with a new card at 0% interest. It isn’t always that easy of course. Typically to qualify for any of these options you need a good credit score and strong payment history. Once you can do so, however, it’s often worth trying to lower your interest payments.

The only catch is with student loans. Refinancing student loans can be a good idea under the right circumstances, but be careful. Student loans processed through the Department of Education have protections that help you in case of financial hardship, such as income-based repayment and payment deferrals. Once you refinance you lose those protections entirely. It might be worthwhile in exchange for a better interest rate, just make sure you understand the tradeoff.

The Bottom Line

You can absolutely become debt free, even though it will take some work. You’ll want to make a plan and the best place to start is by focusing on the debt that’s costing you the most money in fees and interest first. There are different ways to tackle your debt, though, so you may want to work with a professional in order to find the right one for you.

Tips for Financial Planning

If you’re looking to build out a financial plan to get out of debt or grow your wealth, working with a financial advisor could help. They can pinpoint things you need to do for your unique situation and make sure you are on track. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Should you prioritize paying off your debts? A good way to decide how aggressive you should be when it comes to debt is by taking a look at your debt-income ratio. The more skewed this gets, the more you might want to look at making some changes.