The Guide to Getting Out of Debt Fast

In early 2020, the total U.S. household debt reached $14.1 trillion, according to the Federal Reserve Bank of New York. Buying on credit has created an average personal debt in the U.S. that exceeds $90,000. 

That’s a lot of money.  

One financial study determined only 28% of Americans are financially healthy. Put simply, it’s just too difficult to achieve financial security and build savings and wealth if you’re constantly catching up on bills.  

Debt stays with you at all times. This can cause both financial and personal stress. And to make matters worse, the further you fall into debt, the more work it takes to get out of the hole you’re in.  

The good news is that you don’t have to give debt that kind of control over your life. 

Regardless of your situation, don’t panic. There’s always a way out, even when it feels like you’ve come to the end of the road.  

In our definitive guide on how to get out of debt fast, we’ll go over the different types of debt, how to assess your situation, some steps you can take to lower your expenses, and various strategies you can use to eliminate your debt for good. 

1. Confront your debt: Motivation  

Facing your debt head-on—rather than pretending it doesn’t exist—is one of the first steps to eliminating it. First, you’ll need to answer some questions: How much debt do you have? What kinds of debt do you have?  

According to Statista, the majority of American debt comes from mortgages. However, as long as the interest rate is fair and your payment fits your budget (not more than 28% of your gross income), mortgage debt isn’t a bad thing. That’s because you’re paying into an asset that has long-term value: Your home! 

But, Americans have many other types of debt—and a lot of it. Student loan debt, for example, exceeds $1.5 trillion, while auto debt has reached $1.33 trillion. Credit card debt has also eclipsed $1 trillion.  

Yes, that’s trillion—with a “T.”  

Now, you want to know how to get out of debt fast, right? You don’t want your debt to be a part of that $14 trillion pile.  

Here’s what you should do first: Start by taking inventory of your debt. This requires some courage. But you can no longer afford to hide or ignore your loans. So, get out a pen and paper—or create a new document or spreadsheet—and start crunching the numbers. 

To give you a clear idea of how to do this, let’s use our friend Jimmy as an example. Jimmy is a 28-year-old engineer living in Florida. He wants to get out of debt quickly, so he lists his debts on his dry erase board:  

• $23,000 in student loan debt 
• $7,000 in credit card debt 
• $8,000 in auto debt 
• $2,000 in personal loan debt 
• $140,000 in mortgage debt 

Now, do this yourself. Don’t leave anything out—even that money you owe a friend for pizza last Friday.  

2. Assess your financial situation: Warming up 

Now that everything you owe is laid out in plain view, it’s time to get to work. Keep in mind that there are three factors at play here: 

• Your debt 
• Your income 
• Your expenses 

Write these down. If you’re not entirely clear on your expenses, that’s okay. We’ll get to that in a second. First, let’s go over how you should analyze your financial situation: 

Calculate your debt-to-income ratio. 

The first step you need to take is figuring out your debt-to-income ratio (DTI). A DTI calculates how much you owe in relation to how much you earn each month as a percentage.  

To get started, take your total debt and divide it by your gross annual income. For instance, if you earn $5,000 per month but make $1,800 worth of student loan and mortgage payments, your debt-to-income ratio is .36, or 36%.  

To help with this, let’s go back to the example of Jimmy. Jimmy has a total of $180,000 in debt. He makes $90,000 as an engineer. So, he does the following calculation: 

• 180,000 ÷ 90,000 = 2.0, or 200%. 

Jimmy’s debt is two times his annual income. That may seem overwhelming, but with the right plan, he can erase all his debt much faster than you might think.  

Analyze what got you into debt 

Many folks have gotten themselves into debt as a result of uncontrolled spending habits. However, there are many other reasons for accruing debt, such as medical expenses, housing repairs and student loans, to name a few.  

So, why did you get into debt? Did you:  

• Take out a $50,000 student loan for graduate school? 
• Lose your job and have to pile on debt just to get by?  
• Get a $60,000 car loan to buy a Tesla? 
• Go on a luxury vacation around the world? 

Some reasons for getting into debt may be more justifiable than others. But regardless of how you got into debt, know you can fix the situation. It will, however, take discipline and commitment. 

The biggest rule here is to not get into any more debt. If that means paying a bit more each month for better health insurance, do it. Or, if it means hiding the credit cards, do that. Anything that will prevent you from being tempted (or forced) to overspend or overextend your budget is crucial. 

The point is this: Don’t take on any more debt!  

Look at your budget 

Better budgeting is the key to paying off debt quickly. If you already have a budget, that’s great! Now’s the time to do a serious audit of it.  

If you’re one of the 33% of Americans that doesn’t create budgets, start now. A budget worksheet can help with organizing and making sure you don’t miss anything. You should first start by taking stock of each and every monthly expense. 

Once you have a clear view of all your expenses, ask yourself: Where can I save money?  

Begin with discretionary (unnecessary) spending and identify some potential areas to save. You may spend too much on dining out, shopping, or traveling. Mark the spending categories where you can save money.  

Then, go over necessary expenditures. Perhaps you could save a little bit on electricity, find a better deal for home internet, or get a cheaper phone plan.  

The goal of your budget is simple: Spend less than you earn. Once you get intentional about every dollar that you spend, you’ll likely discover that you can save money each month.  

We’re not saying to live in your parent’s basement and eat pasta every day (though that could get you out of debt faster). We’re simply saying that you need to find where you can cut expenses. The more money you save, the quicker you can pay off your debt.  

Review your income 

If you work at a company, you probably have a consistent paycheck, which is pretty easy to track. If you have income from other sources (such as investments or a side job), you should add those in too.  

If you’re self-employed or run your own business, it is likely that your income likely rises and falls. The best way to account for this is to find your average income per month.  

Once you have that number, ask yourself: Is there any way I can boost my income?  

For instance, let’s go back to Jimmy. He earns $90,000 as an engineer. He wants to get out of debt faster, so he takes on side projects during the weekend. This helps him earn $1,000 more per month ($12,000 per year). That brings his gross yearly income to $102,000.  

There are other ways you can increase your earnings and get out of debt faster. These include:  

• Selling personal belongings that have financial value but no sentimental value. That could be an extra coffee table, kids’ toys you no longer use, and even jewelry.  
• Driving for a ridesharing company, such as Uber or Lyft, during your free time.  
• Renting out that parking space you don’t use.  
• Becoming a private tutor in your area(s) of expertise.  
• Finding a higher paying job (or working to get promoted). 
• Asking for a raise at your current job. 

Know this: Your income doesn’t have a ceiling. Investigate how you can increase it—you’ll be surprised by the number of options you have. 

3. Eliminate debt: Game time 

Want to know how to get out of debt quickly? 

Here are the two most important steps you can take:  

• Spend less. 
• Earn more.  

Doing so leaves you with more money each month to pay off debt. This is easier than you think, as you can reduce expenses by doing things like eating out less and boost your income with a part-time job.  

Reduce your expenses and boost your income 

Now, let’s return to Jimmy. He has a debt load of $180,000. Let’s assume an average interest rate of 6% since his low-interest mortgage makes up the bulk of the debt. (We’re simplifying this for clarity.) 

Currently, Jimmy can pay $1,000 per month on his mortgage, plus $1,000 on other debt ($2,000 in total). Since he works side projects that give him an extra $12,000 per year, he now has an extra $1,000 to put towards his debt every month. Now, he can pay off $3,000 in debt each month.  

Just by increasing his income, here’s how much faster Jimmy can get out of debt: 

• If Jimmy kept paying $2,000 per month, it would take him 120 months to become debt-free. That’s 10 years. By then, Jimmy would’ve paid nearly $60,000 in interest fees.  

• If Jimmy paid $3,000 per month, it would take him 72 months to become debt-free. That’s just 6 years. Additionally, Jimmy would only pay just over $34,000 in interest fees.  

Do you see how something as simple as making a little more money can help? But let’s go even further: What if you reduce your expenses too?  

Let’s say Jimmy decides to stop going out to restaurants and bars as much and winds up saving $200 per month. He also starts comparison shopping at the grocery store saving $100 per month and cycling to work saving $50 per month on gas. On top of all that, he takes less expensive vacations, saving $1,200 per year (or $100 per month). That equates to $450 saved each month!  

With all of those savings, Jimmy could now make payments of $3,450 per month. So, how much sooner could he pay off that $180,000? 

• If Jimmy paid $3,450 per month, it would take him 61 months to become debt-free. That’s just over 5 years. And by then, Jimmy would’ve paid only around $29,000 in interest fees.  

As you can see, the keys to getting out of debt quickly are straightforward: Earn more and spend less.  

Utilize tools to fight debt 

As mentioned before, not all debt is created equal. The average credit card interest rate hovers around 19%, according to WalletHub data. Meanwhile, Bankrate data shows that average auto loan rates span between 4% and 8%.  

Before you begin tackling your debt, consider whether any debt-fighting tools could help save you money. Crunch the numbers and see if any of the following debt reduction strategies would benefit you:  

Credit card balance transfers 

Need immediate relief from high-interest credit card debt? Many credit card providers have introductory offers with 0% APR (annual percentage rate) periods. Transfer your existing balance to the new credit card, and you could pay $0 in interest fees for 12 months or more.  

Note: There will typically be a balance transfer fee. Calculate how much this fee will cost against how much you’d pay in interest fees if you didn’t make the transfer to determine whether it’s worth it. Also, keep in mind that you may need a good credit score to qualify for some cards.  

This option makes the most sense if you have high-interest consumer debt. It’s also a good choice if the balance transfer fee is minimal and you can pay off most of the debt during the introductory 0% APR period. 

Debt consolidation loan 

This can function similarly to a balance transfer. A debt consolidation loan involves taking out one loan at a lower interest rate to pay off multiple sources of debt with higher rates. This can save you money on interest fees and make payments less complicated and stressful.  

Many debt consolidation loans are unsecured personal loans. However, you can also tap into the equity of your home by applying for one of the following: 

• Home equity loans 
• Home equity line of credit 
• Cash-out refinancing  

Since loans that use your home’s equity are backed by an asset, they often come with lower interest rates than unsecured personal loans. This is why they are a good way to consolidate other debt, such as credit card and student loans.   

When debt consolidation makes sense: This only makes sense if debt consolidation will save you money and make life easier for you. You’ll probably have to provide a source of income and undergo a credit check in order to receive a debt consolidation loan. 

Debt management plan (DMP) 

Nonprofit credit counseling agencies offer debt management plans for folks who need more time to pay off debt. A DMP is a strategic tool to get yourself back on the right financial track. The credit counseling agency will negotiate on your behalf for lower rates and more appropriate payment plans. Then, you’ll agree with the agency to repay the money you owe over a span of three to five years. 

Note: Fraudulent DMP agencies exist. Only work with credit counselors who partner with the National Foundation for Credit Counseling.  

When a debt management plan makes sense: This is a program, not a loan. If you’re drowning in debt, need more time to repay, and/or have too much debt with high-interest rates, a debt management plan could make sense.  

Student loan forgiveness 

Have student loan debt?  

Check to see whether you qualify for student loan forgiveness. The U.S. Department of Education says borrowers may qualify for partial or full student loan forgiveness if they:  

• Work for the government or a non-profit organization 
• Teach full-time for five years at a low-income elementary school 
• Have become permanently disabled 
• Have a Perkins Loan and meet criteria for employment or volunteer service  
• Have declared bankruptcy 

When student loan forgiveness makes sense: If you have student loan debt and qualify, then student loan forgiveness always makes sense.   

4. Choose how to pay off your debt 

Let’s review… 

By earning more and spending less, you can pay off your debt faster. Like Jimmy, you can get out of debt in half the time!  

Additionally, by utilizing debt reduction strategies, such as a debt consolidation loan, you can simplify payments and reduce interest fees. That also means you’ll get out of debt sooner.  

Now, you may be asking yourself: How should I go about paying off my debt?  

Essentially, there are two strategies here:  

1. Paying off your debts from highest interest to lowest interest 
2. Paying off your debts from smallest to largest (a.k.a. the “debt snowball”)  

If you have discipline and can juggle many different payments, paying high-interest debt first makes sense. It will also save you the most money (if you stick to the plan).  

When using the high-to-low strategy, do the following each month:  

• Pay the most you possibly can on your high-interest debt. 
• Pay the minimum balance on all your other debts.   
• Keep working down till you’re left with no debt. 

Remember Jimmy? If he used the debt snowball, his $3,450 in monthly debt payments would look like this for the first month: 

Type of Debt	Balance	Monthly Payment
Credit Card - 19% APR	$7,000	$1,550 (most that he can pay)
Personal Loan - 8% APR	$2,000	$200 (minimum)
Student Loan - 7% APR	$23,000	$350 (minimum)
Auto Loan - 5% APR	$8,000	$350 (minimum)
Mortgage - 3.5% APR	$140,000	$1,000 (minimum)

 

Now, let’s talk about the debt snowball method… 

Paying off your smallest balances first is a good move if you want to see progress immediately. That’s why famous voices in personal finance, such as Dave Ramsey, advocate for the debt snowball method. It allows you to gain momentum as you clear each balance.  

When using the debt snowball strategy, do the following each month:  

• Pay the most you possibly can on your smallest balance. 
• Pay the minimum on all your other debts.  
• Keep working up the list till you’re left with no debt.  

If Jimmy used the debt snowball, his $3,450 in monthly debt payments would look like this for the first month: 

Type of Debt	Balance	Monthly Payment
Personal Loan - 8% APR	$2,000	$1,450 (most that he can pay)
Credit Card - 19% APR	$7,000	$300 (minimum)
Auto Loan - 5% APR	$8,000	$350 (minimum)
Student Loan - 7% APR	$23,000	$350 (minimum)
Mortgage - 3.5% APR	$140,000	$1,000 (minimum)

 

Each debt payoff strategy has its advantages. Can you stick to a strategy that clears the most expensive debt first? Or do you need a strategy that builds momentum and motivates you? What you choose depends on your preferences and circumstances. You know yourself better than anyone. 

5. Become debt-free: Victory! 

The key to becoming debt-free is to hold yourself accountable. Get support from family and friends. They will root you on as you work towards eliminating all your debt.  

If you need help formulating the right strategy, don’t hesitate to reach out to a financial advisor. They’ll work with you to create the best debt reduction strategy and see that you’re taking the necessary steps.  

You now know what you have to do. Stay disciplined and committed. If you stick to the plan, you’ll pay off all your debt as fast as your spreadsheet says you will (and maybe even faster!).  

Good luck on your journey to a debt-free life!