With almost half of Americans falling deeper into debt and 77% feeling anxious about their financial situation, there has never been a more critical time to re-examine your current relationship with debt.

Growing up, my parents talked about debt a lot. I frequently found myself privy to discussions about how they planned to finance the needs of our family, including housing, cars, schooling for my sister and me, vacations, etc.

I’ll always remember those discussions because of how stressful they sounded. Ever since then, I have been committed to learning as much about debt as possible so that when the time came to pay off my own, I’d be prepared.

Having debt is stressful because it gets in the way of your financial security and freedom. In fact, 42% of U.S. adults report that money concerns and dealing with debt negatively impacted their mental health, leading to a host of problems such as anxiety, stress, and depression. With total U.S household debt topping $16 trillion in the first half of 2022 and rising, it’s never been a better time to get a better handle on your debt.

Here’s how.

1. Understand the Psychology of Debt

Source: Tenor.com

Getting in and out of debt isn’t just a game of numbers; it’s also about how you think about spending and saving.

If you want to beat your debt, you need to have the right mindset and come to terms with emotions like guilt, anxiety, or denial that commonly come with having debt.

Everyone’s financial situation and reasons for getting into debt are different, but the sooner you can come to terms with your current situation, and extinguish unproductive feelings or the internal narrative that you’ll never be debt-free, the sooner you’ll actually start your debt reduction journey.

Read more: The Relationship Between Your Money and Your Mind

2. Commit to Debt Reduction

Now that you have the right mindset, it’s time to commit.

Every debt reduction journey needs to be grounded in a set of clear, time-specific goals that are personally meaningful. Imagine yourself without the emotional and financial overhang of your debt. Imagine how much more money and peace of mind you would have if your debt was reduced or eliminated.

A helpful practice is to write down how you’d feel and all the things you’d be able to do if a smaller chunk of your earnings went towards debt payment. That’s the future you want to create.

Having written down your goals and what future “you” looks like, post it somewhere you can see every day. This will keep your goals top of mind.

3. Understand Your Debt

At the start of 2022, the average American had ~$155,000 of debt. Most of this debt was concentrated in mortgages, but many Americans also carry credit card debt, student loans, auto loans, home equity loans, and other debt like personal loans.

Source: New York Fed


Knowing where to go in your debt reduction strategy starts with knowing where you are. Create a spreadsheet of all your outstanding debt and document:

  • How much debt is outstanding, by lender
  • What the interest rates are
  • The type of interest rate (fixed or variable)
  • Payment frequency
  • Payment due dates
  • Minimum payment amounts
  • Any prepayment fees/limits

Don’t leave any kind of debt out, including any buy now, pay later obligations (this is still debt). That list will act as the foundation for driving where you need to focus, will keep you committed, and will help you celebrate quick wins as you refresh your balances.

As you make your list, also classify your debt as good versus bad debt:

  • Good debt is at a manageable interest rate and tied to an asset like a house or a business.
  • Bad debt is consumer debt on high-interest financial products like a credit card or unsecured personal loan that was used to fund things like vacations or big material purchases.

Be sure to note anything that is surprising on the list as it may uncover spending habits that need to be curtailed.

4. Understand Your Spending

Since debt is a function of spending, get clear on where your money has gone over the period when you accumulated your debt.

Debt can sneak up on you unexpectedly and hit you like a wall, so this is a critical step. Knowing where you are spending also lays the foundation for how much income you can allocate to debt payments.

As you do this analysis, look out for:

  • Emotional or impulsive spending (especially e-commerce)
  • Frequently ordering in or eating out
  • Excessive vacation spending
  • Alcohol consumption
  • Frequent big nights out
  • Unused subscription services
  • Late fees from missed debt payments
  • Overdraft fees
  • Living in accommodations you can’t afford given your salary
  • Financing a luxury car

With this information in hand, start thinking about where you can cut spending to unlock more funds for debt repayment.

Read more: 22 Bad Money Habits Everyone Should Put Behind Them

5. Earn More

Unfortunately, life costs a certain amount and seems to cost more every day.

While most financial people will tell you to focus mostly on the spending side of the equation with debt reduction, one of the most effective ways to pay down debt faster is to make more money.

If you can, explore selling things you don’t need, or starting a side hustle based on something you enjoy. The more you make, the more you’ll have to put towards debt.

Read more: Side Hustle Ideas: 25 Ways to Make Money on the Side

6. Get Professional Help

When struggling with debt, it’s helpful to enlist the assistance of a professional debt counselor. Debt counselors teach money management and debt reduction skills so that individuals can make future financial decisions on budgeting, credit, and debt management.

Debt counseling agencies are usually non-profit organizations and offer free or low-cost advice. Introductory counseling can be free but may involve an enrollment fee or a monthly fee afterward depending on the help being sought. Most agencies create free debt education materials; however, other services like debt management and repayment plans must be paid for.

Working with a counselor individually won’t have an impact on your credit score but what you do after working with a counselor may.

While debt counseling can carry a negative association, you don’t need to be in bad financial shape to enlist one. They can be a helpful resource for proactively managing your financial health.

Some popular government-approved debt counseling services include:

Note that if you’re filing for bankruptcy in the U.S, you must by law work with a credit counselor.

7. Focus on High-Interest Debt

Now that you know what your debt is and where your money went to get it, prioritize your debt payments based on your most expensive type of debt.

This debt payment strategy is referred to as the avalanche strategy and focuses on making the minimum payments for outstanding debts while allocating more to high-interest debt (e.g., a credit card).

As you make progress, you can take the money you previously budgeted for the highest interest debt payment and allocate it to the next highest interest rate debt.

The avalanche strategy will often help save you money on interest, versus the snowball approach, which focuses on reducing debt with the lowest balance first.

Read more: Snowball vs. Avalanche: Which Debt Payoff Method Is Best?

8. Pay More Than the Minimum

To get out of debt fast, put as much as you can towards that debt. Every incremental amount can make a big difference.

For example, if you have a $15,000 personal loan at a 5% interest rate and minimum monthly payment of $300, it would take you over 4.5 years to pay that balance off. If, however, you increase your payment to $500, you’d pay that loan off in 2.7 years.

Additionally, making more than just the minimum payment reduces your total debt utilization ratio which in turn, can improve your credit score.

Read more: What’s Your Credit Utilization Ratio?

9. Explore Debt Consolidation

Debt consolidation involves taking out a new loan to pay off multiple loans. It’s commonly done via an unsecured personal loan. Exploring this option can help you reduce monthly payments and extend when you need to pay off your debt.

This strategy can work for some, but personal loans often have higher interest rates than loans secured by some sort of asset, and many types of personal loans should be avoided, like payday loans or other short-term, high-cost loans.

Read more: The Best Way to Consolidate Debt: A Complete Guide

10. Negotiate Debt Settlement with Creditors

Source: Giphy.com

Debt settlement is a type of debt relief that involves working with your creditors (those who you owe money to), to reduce the total amount owed. The goal is to come to an agreement on what will ultimately be paid. Some payment is better than none, after all.

While debt settlement can help to reduce the total debt owed, avoid bankruptcy, and pay off debt sooner, it can materially impact your credit score, make it harder to get future credit, and cost thousands of dollars. Plus, any debt that’s discharged may be taxed in the upcoming tax season.

Choosing debt settlement should be done based on your own financial situation but it is often seen as a type of last resort. A debt counselor can often help mediate discussions with creditors.

Putting It All Together

Paying off debt isn’t a one-size-fits-all undertaking but if you go into it with the right mindset, goals, persistence, and consistency, it can be done.

By knowing why you got into debt and the type of debt you have, you’ll be well-equipped to start building out a repayment strategy that works for you.

Just keep remembering why you started on your debt reduction journey and the end game. Future you will thank you.

Featured image: Douw de Jager/Shutterstock.com

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About the author

Total Articles: 15
Aubrey Chapnick is a Certified Financial Modeling and Valuation Analyst and has completed the CFA Institute's Investment Foundations certificate. He also holds an MBA from the University of British Columbia. His professional career consists of consulting for financial services companies, and working in product management and strategy in the investment industry. Aubrey also had a brief stint in investment banking and equity research. Aubrey is currently working in the capital markets intelligence industry and is a freelance writer for personal finance, business, and career topics. His work appears online and in print media outlets throughout Canada and the U.S. When not writing about finance, or the markets, Aubrey's busy watching Formula 1, staying active, and managing his investment portfolio. All thoughts and opinions expressed by Aubrey are his own and not those of his current employer.