How to Get Out of Debt in 2020

How much money can you afford to allocate for paying off debt? There are several ways you can figure out the number that’s best for you. You can gather your monthly income and expenses via your bank's online system, or sign up for Mint.com, or download software like Quicken. Then separate the essential costs—groceries, housing, utilities, transportation, and so on—from discretionary spending, such as entertainment, dining out, and impulse buys. When you’re done, you should have three lists of monthly financial data going back 12 months:

• Income
• Essential expenses
• Discretionary expenses. 

To simplify, create monthly averages for your income and both expense categories.

Now, how much discretionary spending do you think you can do without? It's important to allocate a monthly amount of money you can afford for paying off your debt. That may mean some lifestyle changes, but it also should include a reality check. If you know the most you’ll be able to realistically commit to is $450, it’s best to start with that rather than a higher number that will be more challenging to maintain long term. You’re more likely to stay on the right track when you have the satisfaction of successfully following your plan. So, as you're building your budget, pick a debt-paydown amount that is meaningful and that you can live with. If you find that the amount you can live with won’t have a meaningful impact on your debt, consider a personal loan for debt consolidation (see Step 6).

The next step is to catalog all the debt you're carrying, such as student loans, month-to-month credit card balances, retail store balances, and auto loans. For each loan or creditor on your list, gather the following information:

• Lender's name
• Payoff amount
• Interest rate
• Expected payoff date
• Amount you're already paying each month. 

Home mortgages usually come with relatively low interest rates for qualified borrowers, so you can exclude that loan unless the final payment is within sight. You can also exclude or de-prioritize any loan that has zero percent interest.

Now that you've gathered information about your loans, your income, and your spending, it's time to make a plan. Here are three popular strategies I like to think of as the “wintry mix”:

• Snowflake uses small bits of “found money”—the forgotten $20 bill in a jacket pocket and the change at the bottom of your couch—to pay down your debt. It may sound a little silly, but it works.
• Snowball targets paying off debt from smallest amount to largest, regardless of interest rate. The idea is that the satisfaction of eliminating an entire debt motivates you to maintain your getting-out-of-debt discipline.
• Avalanche is my favorite. It targets the loan or credit card balance with the highest interest rate first.¹ Once that's paid off, you refocus on the balance or loan with the next highest interest rate. Since interest charges are accruing on all outstanding debt every month, choosing the highest interest rate debt to pay off first can save you money.

Of course, you can also employ snowflake with either of the other strategies. (See Step 6 for a way to supercharge any of them.)

Experts say the number one rule of credit cards is to use only as much credit as you can afford to pay off in full each month.² If you really want to get out of debt, you can start that right away. Heeding these experts’ advice will help you stop adding to your credit card debt while you’re trying to become debt free.

Personal loans generally have a lower interest rate than credit cards, although they may be higher than certain auto loans and home equity loans, which are secured by cars and houses, respectively. Regardless, however, taking out a personal loan to consolidate your debt has an important advantage: Chances are your monthly payment will be lower, potentially quite a bit lower, than your combined payments are today. The flip side to that advantage is that the consolidation loan will probably have a later payoff date, which means you could wind up paying more interest than you would have before.³ (For more detail on personal consolidation loans, see “Should You Take Out a Personal Loan to Pay Off Credit Card Debt?”)

A practical approach for a debt consolidation loan is to pay more than the minimum payment to shorten the life of the loan. Let’s say you consolidate all or most of your loans and balances, ending up with a 40% reduction over your previous monthly payments. You could apply a portion of that freed cash flow—say, half—to paying down the consolidation loan faster.

Think of this as boosting that wintry mix into a blizzard. Most of us have items of value that we no longer use or appreciate, such as jewelry, electronics, tools, furniture, collectibles, exercise equipment, and so on. Depending on how much unneeded stuff you have accumulated, you could find that it generates $300 or more a month selling via auction, classified ads, or other online e-commerce marketplaces.