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Get Out of Debt on Your Own: My Big Fat Guide to Kicking Your Debt’s Butt

You CAN get out of debt on your own! I paid off $80,000 in credit card debt in about 3 years. It’s not easy, but these rules helped me do it. Learn how.

Get out of debt by yourself with the big fat guide to kicking debt's a**.If you want to get out of debt on your own (and quickly), I’ve got the post that will help you do it.

Not someday. Not tomorrow. Right. Freaking. Now.

Get your boots on.

Warning: There’s a lot of information here. I tried to make it as skimmable as possible, but you can jump to sections like the three prerequisites to permanently ridding yourself of debt, how to calculate your Debt Ratio, or the debt toolbox which shows you how to use things like balance transfers and social lending to get out of debt faster.

I’VE BEEN THERE

If you’re new to Money Under 30, let me catch you up on my story.

I was a debt junkie for almost ten years. I ran up credit card after credit card living like my salary was about four times its actual size. Stupid things I bought on credit included flying lessons, weekends in Vegas, and a spanking new pickup truck. Hey, I never said I wasn’t having fun. (Remember, I’m on the other side of 25 now, so I started college pre-recession… during the dot-com boom. Back then, I actually thought I could graduate with a sociology major into $75k a year job—because I knew people who did!!!)

Yeah, right.

We all know that didn’t’ happen, and soon enough, the debt caught up with me. Around the ages of 25-26, I maxed out with debt of around $80k. All of a sudden, I couldn’t keep borrowing my way out of trouble anymore. At the same time, I realized that the stress of barely making my monthly payments and owing twice what I earned in a year was taking its toll. I was, to quote my bio, “maxed out, stressed out, and fed up.”

So I decided to change.

I’m a smart guy. And I don’t consider myself afraid of a little hard work. So several years ago, I resolved to:

  1. Get out of debt on my own.
  2. Go a step further and achieve a kind of financial stability that most people never do.
  3. Blog about it in a way that makes it accessible to others.

(And here we are.)

Today, I have no consumer debt. By choice, I’m not debt-free. For example, I’ve chosen not to pay off early two student loans totaling about $4k because they’re at interest rates of three and five percent. (To learn why, read my recent post on when paying off student loans early makes sense and when it doesn’t.) I also recently bought a home with a 20-year fixed rate mortgage. In these cases, I’m using debt conservatively and consciously to advance my financial goals. But all the nasty stuff—credit cards, personal loans, and an auto loan—is long gone.

YOU CAN DO THIS, TOO

I blog because I want to help you get a hold of your finances and get them to a place where you can stop worrying about money and get on with life.

Contrary to what hundreds of marketers and self-described personal finance “experts” will try to sell you—there is no secret to getting out of debt. No right way. No silver bullet.

That said, I think it IS fair to say there are a few requirements to permanently ridding yourself of consumer debt.

  1. You must confront your debt.
  2. You must permanently change the behaviors that got you into debt.
  3. You must make enough money to repay the debt.

Throughout all the years I carried this debt around with me, I never wanted to be in debt. But it wasn’t until I met the three criteria above that I was able to do something about it. First, I had to stop living in denial, telling myself my debt “wasn’t that bad”. I needed a reality check and to stare down exactly how much debt I had and what it would take to get out.

Second, I needed to figure out why I was in debt and STOP DOING THOSE THINGS. I had to tone down my lifestyle. By a lot.

Finally, I had to find a way to earn enough to repay the debt. So I got a second job, worked on a series of job changes that increased my income, and started this blog which—in time—created yet another income stream.

Now, let’s break this down and see how you can apply these three requirements to your debt.

Confront Your Debt

I’ve written before about being afraid of your finances, because I think this actually happens. There was a time in my early twenties, when my debts were steadily mounting, that I knew I was in trouble, but I was too scared to actually tally up how much debt I was in. I paid minimum payments, and forgot about them until the following month. If this is you—or if you simply need a refresher as to your current (negative) net worth. Let’s take a look. Tally up all your debts. Credit cards. Student loans. Auto loans.

And anything else. For now, we’ll leave any mortgages out of it.

For repayment purposes, you can hold off on paying off early and student loans with really good interest rates (say, sub-seven percent). But for benchmark purposes, include those, too.

That’s your number.

Although your absolute total debt is important, it’s not as important as how that debt compares to your annual income. It’s time to calculate…

YOUR DEBT RATIO

A debt-to-income ratio is a commonly used figure, but it’s often calculated different ways. For example, when you apply for a mortgage, the banks calculate your DTI as the percentage of monthly debt payments of your MONTHLY income.

Last year, I reviewed the book Your Money Ratios by CBS MoneyWatch columnist Charles Farrell. I liked Farrell’s idea of simplifying financial planning by applying ratios to personal finance (something that financial professionals do all the time, anyway).

Although not one of Farrell’s ratios, I like to calculate a Debt Ratio as the amount of total debt (excluding mortgages) as a percentage of gross annual income.

  • Example 1: You earn $50,000 a year and have $25,000 in debt. Your Debt Ratio = 0.5.
  • Example 2: You earn $100,000 and have $250,000 in debt. Your Debt Ratio = 2.5.

Your debt ratio tells you how indebted you are for your income level.

This gives you a benchmark for how indebted you are (and what it will take to escape). Here’s how this breaks down.

  • 0.0 – .19 (Not Bad)
  • 0.20 – .34 (Fair)
  • 0.35 – 1.0 (Poor)
  • 1.0 – 2.0 (Warning)
  • 2.0 or more (Oh, hell)

In case you’re wondering, my debt was way above 2.0 for a while.

So whatever your debt ratio, don’t despair. If yours is way up there, it just means you have some work to do. If your debt ratio is in the fair range, don’t brush it off…that only means you should be able to pay it off—on your own—more easily (and quickly).

Change the Behaviors that Got You Into Debt

Why people stay in debt.

People get into debt for different reasons. School, job loss, medical bills, or, if you’re like me, STUPIDITY. But why you got into debt doesn’t really matter. What matters is that you don’t let it happen again! (If you can control it. You can’t, obviously, control getting sick, although you can make sure you have health insurance.)

  • If you took out $50k in student loans for a bachelor’s degree, don’t take out $100k more for a PhD.
  • If you fell into a pile of debt after losing your job, resolve (once you get out of debt), to work on an emergency fund should this happen again.
  • If you, like me, spent years living a life you couldn’t afford, then figure out what the life you can afford looks like, and get there.

This last step is easier said than done. In fact, that goal alone is responsible for about a third of every personal finance article every written. “Live within your means,” “spend less than you earn,” etc., etc.  Why has so much written about such a simple, simple concept?

Because once we get accustomed to living a certain way, it’s incredibly difficult to change. You know, how do you start living on Ramen after two years of The Capital Grille?

That’s where this comes in:

Earn Enough to Get Out of Debt

Getting out of debt (and doing it on your own), not only requires you to live within your means, but to live below it. Put another way: you need to go from a situation in which you’re spending more than you earn into one where you’re earning more than you spend. And the faster you want to become debt free, the more you have to earn above and beyond what you spend.

Personally, I knew I was never going to get out of debt just by cutting spending unless, perhaps, I lived with my parents until 35. (No offense, Mom and Dad, but no thanks.) I simply didn’t earn enough money. I had to earn more. So I did several things: I got a second job (at Starbucks, of all places), I looked for higher paying day jobs and moved (a couple of times), and I started this blog. Between the second job, a career change, and starting blogging, I added $15,000 to my annual income. And in about four years, I went from earning just over $30,000 to making over six figures.

I do not say this to brag or to claim that I’m anything special. I say it only to make a point. If you put your mind to it, you CAN get out of debt. If you put your mind to it, you CAN increase your income. If you put your mind to it, you CAN get a better job. If you put your mind to it, you CAN start a part-time business.

Not everybody has to earn more money to get out of debt, but it makes it a lot easier.

IDEAS FOR EARNING MORE MONEY

There are literally endless ways to earn extra money, but all could fall into these three categories.

  • Sell stuff.
  • Work harder.
  • Work smarter.

Selling stuff. If you have STUFF, then you can make money. Find stuff you don’t use anymore and hit up eBay or Craiglist or a yard sale. If you want a kick in the pants to do this, buy a copy of Man vs. Debt’s Sell Your Crap course (I’m not an affiliate, I just love Baker’s stuff). The good thing about selling stuff is you can get cash fast. The bad news is it’s not sustainable; sooner or later, you’re going to run out of crap to sell.

Working harder. Get a second job or work overtime, if available. I’ll be blunt, second jobs are no fun. Think of how tired/stressed/soulless you feel after your 9-5 already, now imagine getting in your car, battling rush hour traffic, and putting in another four hours from 9-10. Then you get home around 11, just in time to watch the Daily Show and pass out. Putting in extra hours earns extra dollars, but it can suck the life out of you. If this is the route you want to go, however, there are options: food service, babysitting, mall stores, delivery routes, security guarding, tutoring, teaching prep classes, bartending, cab driving, etc.

Working smarter. This is my personal favorite way to increase your income, and you’ll see why. Working smarter is about getting promoted at work. Or, if your job won’t promote you: finding a higher-paying job. Or, if you can’t find a higher-paying job: working for yourself. If you make the decision to earn more money by working smarter, you just have to DO.

Note: I can’t take the space here to list a million business ideas, but I have always found inspiration in the Inc. 500, a list of the fastest-growing companies in America. (My first college internship was with Inc.—my job was to interview the CEOs of these companies to about the secrets of their success. It was one of the best experiences of my life.) I still think of that list as “500 ways to make money”.

The Get Out of Debt Toolbox

Motivation is half the battle, but if there are tools available to help you get out of debt yourself, why not take them?

For anybody who wants to get out of debt on your own in 2011, there’s some very good news. It’s not 2010 (or 2009, or 2008). The credit crunch is over. That means, unless you totally scorched your credit score, you may be able to use the credit system to your advantage to help you escape it.

BALANCE TRANSFERS

The 0% credit card balance transfer if back, and in a big way.

For newbs: As a way of attracting new customers, credit card companies will let you transfer a balance (in other words, transfer debt) from another credit card to their credit card at a low interest rate for a said number of months. Theoretically, if you transfer a $2,000 balance at 15% APR to a 0% for 12 months balance transfer card, you could save up to $300 in interest. Find how much you could save with our balance transfer calculator.

There are, of course, pitfalls to this approach. In fact, there are a lot of them. For example:

  • There is often a fee to transfer a balance, eating into savings.
  • Transferring a balance doesn’t solve your problem, it just moves it.
  • You need good credit to get approved for new credit card. (Probably a score 0f 700 or more. You can check your score to get a sense if you’ll qualify.)
  • More credit means more temptation to spend.

Those risks aside, balance transfers can save you money. Current balance transfer credit cards offer 0 percent for up to 18 months. Got a balance at a crazy rate? If you can get this offer and transfer it without a fee, then pay it off in a year, you can save yourself hundreds.

Consider balance transfers carefully, but don’t be afraid to use them if they can help you. In general, look for offers with no fees, 0% APRs, and periods of 12 months or longer. (See current offers here on my recommended credit cards page).

PEER TO PEER LENDING

Eventually, I got to a point where a) I had too much debt to get new credit cards and b) balance transfers obviously didn’t work for me because I would transfer the balance and just spend again on the old credit card. Sound familiar? If so, you may find help in peer-to-peer lending.

In 2006, I consolidated credit card debt with a loan from Prosper. Huh?

Peer-to-peer lending networks like Prosper and LendingClub allow individual people to make unsecured loans to other regular people. No bank involved. You’ll still need good credit to get a personal loan, but you may be able to get a lower interest rate than credit cards in the form of a fixed payment loan (for either 3 or 5 years). That way, you can’t be tempted to make minimum payments.

If you think consolidation loan could help, learn more about Prosper or LendingClub. (I’m now an investor with LendingClub and can vouch that both are legit and AWESOME. It’s the future of consumer finance.)

CREDIT COUNSELING AND DEBT MANAGEMENT

Part of taking the steps necessary to get out of debt is admitting when you need help. Although you can save money by getting out of debt on your own, sometimes it just doesn’t work. That’s where credit counseling and/or debt management may be of help. Just PROCEED CAREFULLY. Although the government has cracked down a bit in recent years, there are a lot of companies out there that advertise these kinds of services that will only make matters worse. AVOID debt settlement scams or any service that promises to reduce the total amount you owe. AVOID any service that charges big upfront fees.

The National Foundation for Credit Counseling is a non-profit organization of reputable credit counselors that can direct you to somebody in your area that can help you make a plan to get out of debt. They may charge a fee for their time or on a monthly basis.

You may also want to research (either through your counselor or on your own) entering a debt management plan. Under such a plan, a third-party company negotiates interest rates, payment amounts, and fees with your creditors. You make one monthly payment to the third-party company and they pay all your creditors. Read 10 things to know about debt management companies to help you decide if this is a route you want to go. If you decide it is, I recommend CareOne Debt Relief Services®. (I actually used them towards the end of my road out of debt to reduce my interest rates and help force me NOT to use the credit cards I was working so hard to payoff. Full disclosure: I’m also a compensated affiliate of CareOne.)

YOUR NEXT STEP

Are you still reading this? Amazing. Thank you! The bottom line is, none of all that I’ve just written is worth anything unless YOU take action. And although getting out of debt is a long process, you CAN start today. And that’s what I ask you to do:

Within 24 HOURS, I want you to DO SOMETHING—ANYTHING—towards getting out of debt. If you do, please SHARE it in a comment.

Here are just a few ideas of things you could do, but I urge you to get creative!

  • Cut up a credit card.
  • Post something you own for sale.
  • Write down a goal to earn more money.
  • Submit an application to a new (higher paying or additional) job.
  • Transfer a high-interest rate balance.
  • Confront your debt (write down your total debt and debt ratio).
  • Reexamine your budget.
  • Make an extra debt payment.
  • Look into credit counseling.

How are you going to get started?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Great article, it puts alot of the things you have already posted into one consolidated post.

  2. Excellent article.

    I’d just like to add a point on the 0% balance transfers:

    I’ve use this method in the past and it greatly helped me pay off debt more quickly and cheaply. However, make sure you read the fine print….

    Many of the 12 month 0% balance transfer offers will charge you interest FROM DAY 1 if the balance isn’t paid IN FULL at the end of the promotional term.

  3. Oh, and I happened to do several of those steps this morning before reading this article (write down total debt, examine budget, and made an extra payment). :)

  4. This year, my husband and I made a few changes… we put ourselves on a strict budget and gave ourselves a cash allowance so we wouldn’t even be tempted to use the debit cards “just to grab lunch,” squirreled our credit cards away so we wouldn’t use them, and went through TONS of stuff that we weren’t using anymore and are planning a neighborhood yard sale for the spring.

    Thanks for always having such great tips!

  5. Wow, this is a really good post. I’m bookmarketing it.

    I find with debt, it hangs over you — I’ve got a student loan, that I’ve been working to kill for years… this year is the one where It’ll be gone for good :D

  6. A good tip that I found on debt reduction somewhere is to try to pay 10% more on the highest debt each month, and that should speed up the time needed to pay it. Then once the highest debt is paid, continue with the next highest, then the next, etc.

  7. Very awesome article. I especially love the picture on why people stay in debt – so very true!

  8. I stopped midway through reading this and made an extra online payment on a credit card. Thanks!

  9. so – money under 30 – how long did it take you to become consumer debt-free? and how old are you now?

    • I’m 29. If you consider the fact that I was IN DEBT since I was 19, then I guess you could say it took me 10 years.

      If you consider the fact that I STOPPED piling the debt ON and started digging OUT just before my 27th birthday, then it took me almost exactly two and a half years.

      • On that note, what happens next year when you’re 30? “Money Under 40″?

        • Brian, you have NO idea how many nights that question has kept me up.

          That said, there are no changes planned so far…I’ll be keeping the perspective focused on finances in the first part of adult life, however you define that–30, 35, 40, etc.!

  10. I just negotiated a salary increase at work and got the good news today. There is ALWAYS more money to make, and you ARE valuable. Don’t forget to tap into the resources already available to you – your CURRENT job. You don’t always have to leave to make more money, especially if you like your job. Be proactive.

  11. Christine says:

    I recently became fed up with the credit card debt that I have been carrying for 6 years and have *finally* taken action to eliminate it, such as making a budget (and sticking to it!), trying to negotiate a lower APR rate, selling stuff (au revoir, gitane bicycle) and making additional payments on my credit cards. This article was EXACTLY what I needed to read. It’s affirmation that I’m on the right track (:

  12. I LOVE LOVE LOVE this article – I’m planning to share it with my husband tonight. Your approach and honestly in the article is so freshing since I myself was in a crazy amount of debt as of last year ($22K at the peak). Essentially, I followed all the steps you mentioned (took a hard look at my total debt, got a higher ($7K more) paying job, transferred balances to a 0% card and paid off a load of consumer debt. I’m scheduled to pay off all my consumer debt by April 2011.

    During the process, I’ve maintained my contributions to my 401(k) to get the max. company match (free money) and have excluded my student loan ($13K remaining) from the process (even though I do pay an extra $50 each month to chop off 6 yrs.) since the low interest rate (2.125%) on the student loan were okay in my mind.

    The one thing I want to mention about the 0% balance transfer offer is to be careful not to open too many, in addition to the warnings offered above, opening too many new accounts in a short time frame can negatively affect your credit score.

    Anyway, I’m 27, married with a daughter, and expecting a son in April – I mention my stats as encouragement that you CAN do this! Now we need to work on my husband’s consumer debt…

  13. Bill Cofield says:

    The most important message is to DO SOMETHING. I would encourage folks to do the reverse of taking on the larger balances first and paying more on them. Pick a smaller balance, high interest card and pay it off. This gives motivation to get the next one up the ladder in your payoff plans. For the sake of your credit score, remember length of history and pay history go together to determine your score so closing that account may actually lower your score over time. If you cannot trust yourself not to use it, close it anyway.

  14. I have a financed $40k that I voluntarily turned in…
    Subsequently, my credit shows “Vehicle Repo” and I am unsure as to what to do. I’m trying to pay down my consumer debt (credit cards, etc.) however, I’m in a bind as to what to do with the turned-in vehicle as I want to put it behind me.
    Any advice is much appreciated.

  15. I simply want to say I’m beginner to blogging and truly enjoyed your web site. Most likely I’m likely to bookmark your blog . You absolutely have superb stories. Regards for sharing your blog.

  16. This site is great! I have the confidence that I can overcome this weight on my wallet. It will take time but it’s clearly possible.

  17. My wife and I are about $7,000 in debt, her car is falling apart, and she is having a tough time finding a job. We are in debt because of about $4-5000 in medical bills that came (that werent covered by health insurance), and slow business/slow commission.
    Because of the medical bills, it put us off track with our rotating credit card payments and put us WAY behind. We have tried the balance transfers, but only found that we are still falling behind. We have cut out most of our spending, but can’t seem to get caught up.

    I’ve done some research on debt consolidation loans from financial institutions, and have found one for a $10,000 loan @ $197/month for 5 years, fixed rate of 6.99%. This will allow us to consolidate all of our credit card & medical bill debt (normally costing around $1000-1500/month) and allow us the cash to get her car fixed, paying one low monthly cost. Once we get her car fixed we are going to start paying more than the $197/month to pay the loan off quicker.

    What are your thoughts on acquiring this personal loan to consolidate, free up cash, and get things done we need?

  18. I have just stumbled upon your website and I am very motivated to pay down my debt i have acquired since 2002. It is under 6,000 so its not too bad. I do have a student loan for 24,000 but i will pay that off over time as its not hurting me as much as my credit cards.
    I have gotten a small settlement check in the mail for 500, so that will go towards my debts for sure.
    I hope to get a second job or a new job with more pay to pay down my debts. I hate living pay check to paycheck just to make end meet. Thank you for your great blog. I have also looked at joining mint.com as that helps with debt and setting goals for yourself.
    Thanks :)

  19. I really liked your article! It was well timed for me today! I have faced a little bit more my financial situation, I have paid some bills today and got a vision of the other ones coming in the next weeks and started an excel spreadsheet of my financial situation. So thanks for the swift kick in the situation! I allready have brought my lifestyle to a more aligned position I am currently in! Now for the rest! Now to face the fears of managing the money!

    Thanks :-)

  20. Hi everyone, in the UK we have student loans, but these are paid back through your salary when you start earning over £15,000 Gross Salary. Depending on when the loan was taken out, interest rates vary from 1-3% (so quite low). Basically if you’re not working, they cant take the money from you. Is this how it works in the US? Great site by the way it really puts things into perspective.

  21. Just paid off a $25k HELOC with a lump sum to start off 2013. It’s our last major debt hurdle, as everything from this point forward is earmarked for savings, investing, and real estate acquisition.

    Thanks for the great content on this site, I just wish it was aroung when I was Under 30!

  22. Love this article. Almost feel like it’s insulting to call it an article. It’s much more than that.

    I have been trying and struggling to get out of debt. I’m a dummy.
    I took advantage of some 0% BT cards and went into more debt. I feel like the people who have the most trouble are the people who THINK they have it under control. They are eventually the people who are stressed out and looking for help. (me).

    I have recently cut everything up and transferred my high interest cc to my lowest int credit card. I’m not able to use any of them anymore. I have $2k in savings at a seperate bank. I am married with no children but I still worry that $2k isn’t enough. My DTI was .88 based on your system. Very depressing but helpful. I’m going to try something drastic and get rid of about $68k in debt on what is currently $71,500 of annual income by the time i’m 30. That gives me almost 3 years. Don’t know why but I feel like writing that actually helped me. Thanks again. I really enjoy the site and this post! Hopefully in 3 years or less i’ll write in with a success story!

    • josephmorrison says:

      thankyou for the imformation it was very helpful and as of today i’m going to my up stairs and get all of my childrens toy’s and different things that are in really fair condition and start selling thing to get out of dept i’ve always been a stay at home mom i’m going to get a part time job and start doubling up on certain depts thankyou we recieved a letter from out morgage company and they told us our house payments went down and i told my husband no you still need to pay the same amount but add more money to the payments