Four Keys To Getting Out of Debt

69 percent people in trouble

In America, debt is a way of life. People borrow money to buy houses, pay for college, buy cars, and buy the things they need in everyday life or to fill the gaps in their monthly budgets or when between jobs. According to recent data from the U.S. Census, as of 2011, 69% of U.S. households had some form of debt, and the median household debt is $70,000.

While some debt is necessary and beneficial (“good debt” such as mortgages that help us afford a nice quality of life in a house that grows in value, or college loans that help improve our lifelong income prospects), many Americans are trying hard to get out of debt and live more simply with greater financial freedom.

Changes Matter

Mary DeGrado Evanson is a university administrator who lives in the Midwestern U.S. In 2000, she and her then-boyfriend, now husband, graduated from college, and they each had about $25,000 in student loans, $10,000 in credit card debt and also carried small balances on several department store cards.

It’s not unusual for young people to have some student loans and credit card debt when they are just getting started in life – after all, average student loan debt in the U.S. is approximately $27,000 per student, and a recent study from Fidelity found that 2013 college graduates had an average debt burden of $35,000 (including credit card debt). But a few years later, Mary realized that they needed to make some serious changes.

“We owned a car that we were upside down on and decided to buy a house in 2005, just a few months after we got married,” said Mary. “Well, that turned out to be the worst and best decision of our lives. We had no business buying a house, at what turned out to be the height of the housing market. We didn’t know the first thing about home loans and made some major errors that we are still paying for. After buying the house we were forced into realizing we had to make some major life changes if we had any hope of staying afloat financially and being able to afford having children.”

Many young married couples need to re-evaluate their financial situation at some point, whether that means saving more money, paying off credit card debts, or trying to put themselves in better financial position to afford to raise a family. Mary and her husband decided to take action to strengthen their household balance sheet.

“My husband is a graphic designer, so in addition to his full-time job, he started to do some freelance work during nights and weekends, and we used that extra income to help pay for things we wanted and to help pay down some of our debt faster,” said Mary. She and her husband also made a detailed plan for getting out of debt.

The Keys

1. Pay Off Highest Interest Credit Cards First

pay down cards

Mary and her husband sat down with their various credit card statements and figured out which cards and loans had the highest interest rates, and then made a priority to pay off the highest-interest cards first. “We checked each card off the list a few months at a time,” said Mary. “You get a high when you shop, but nothing compares to the feeling of freedom and power you get when you pay off a credit card and cut it up!”

2. Use Debt Consolidation for Student Loans

Depending on which student loans you have and who is the issuer/owner of your student loan, there might be programs available to consolidate your multiple student loans into a single monthly payment. “We consolidated our student loans at a low interest rate so that our monthly payment was lower, but then we continued making the same minimum payments we’d been making at our prior interest rates, and we paid more when we could,” said Mary. “Eventually, our student loans got to be at a very manageable level and one at a time, over several years, we wrote checks to pay them off completely.”

3. Drive a Cheaper Car

drive out of debt

Owning a car is expensive, and Mary and her husband used to own a big SUV that got very bad gas mileage. As the price of gas has gone up in recent years, it cost them too much money to keep driving that car. According to Consumer Reports, the median cost of car ownership is $9,100 per year (including gas, maintenance and depreciation) during the first five years of owning it – and big SUVs are even more expensive, with a median cost of ownership of $13,000 per year.

“We got rid of the giant gas-guzzling SUV and bought a small car that we shared until we were able to buy another car with cash,” said Mary. It might seem like a hardship to go from being a two-car family to a one-car family, but freeing up that extra money in your budget gives you extra cash to put towards paying off your debts.

4. Enjoy a Simpler Life

Mary and her husband used to live in Chicago, but big city living can be expensive. Mary and her husband made a variety of little changes in their lives that helped them save big money.

“We stopped going out to bars and restaurants in Chicago every weekend and stayed home with friends more often,” said Mary. “We took cabs less, and walked more. We rented movies instead of going to the theater twice a week. I gave myself a grocery budget and started meal planning, so we were much more purposeful and focused on how much we spent on food. One of the biggest everyday changes was when we started taking our lunches to work. Before, we would each go out to lunch during the workday and spend at least $8 per day on lunch. That adds up to $80 per week, $320 month, $16,640 a year in savings!”

Mary made sure that she and her husband truly saved money each week by keeping track of their spending and constantly moving money into savings as they went along. “A big part of our debt reduction plan required us to actively move money into savings throughout the month,” she said. “For example, if we saved $80 per week by not going out to lunch, we immediately put that $80 into our savings account. This helped us make sure we were actually saving that money, which otherwise could easily have disappeared with a quick trip to the mall.”