How to Get Out of Debt for Good

By Pinyo, on June 4, 2009

The key to getting out of debt for good is to have a positive cash flow and stop digging yourself deeper into debt. If you follow my previous step to earn more and spend less, you should have, or are on your way toward a positive cash flow at this point. The third step in the Financial Success Plan series will be looking at how you can get out of debt for good.

Stop Digging Yourself Deeper Into Debt

While trying to get out of debt, it’s important that you stop adding to it. If you have credit card debt, put your credit cards away. Don’t take out new loans, and for goodness sake don’t even mess with payday loans. If you still need to borrow, read my article Earn More and Spend Less again. You can’t do anything until you are cash flow positive.

Photo by coljay via Flickr

Remember, the only way you can get out of debt is to stop borrowing so…STOP!

Tackle Your Debt

Now you’re ready to pick yourself back up and get out of debt. The basic steps are:

1. Secure better terms for your existing obligations. This means calling your lenders to get a lower interest rate and/or lower monthly payment.
2. Shuffle your debts. Can’t get a better term from an existing lender? Move it somewhere else! Here are some ideas:
   • Take out a bank loan,
   • Transfer you credit card balances,
   • Borrow from social lending networks,
   • Refinance your mortgage,
   • Ask for a loan modification,
   • Etc.

   Again, you want to lower your interest rates and/or monthly payments.

3. Use the Debt Snowball. Make the minimum payment on all but the most expensive debt. For the most expensive debt (highest interest rate), pay it down with all the extra cash you have for the month. As you knock down a debt, you’ll be able to make bigger payments toward the next most expensive debt — thus, the name Debt Snowball. Note: You can exclude your mortgage from this last step.

Additionally, I covered debt reduction in several other articles and you may want to read them as well:

• Dave Ramsey’s Debt Snowball – Overview of the debt snowball method, with commentary on how I’d do it differently from Dave Ramsey.
  
• Do It Yourself Debt Consolidation – A detailed discussion of the steps above.
• How To Eliminate Credit Card Debt On Your Own – A more specific look at reducing credit card debt.

If you like to consider various scenarios, here are a few articles you may like:

• Start An Emergency Fund Or Pay Off Debt?
• Should You Pay Off Your Debt Before Investing?

That wraps up step 3 of our financial success plan. While paying off your debt, remember that persistence and patience are your friends. It is an easy concept to grasp, but it takes a lot of effort, so good luck.

Pinyo is the owner of Moolanomy Personal Finance and an entrepreneur with over 20 years of business experience. He is interested in business management, investing and wealth management. He has written for many online publications, including American Express Currency and U.S. News Money. You can follow him on Facebook and Twitter.

Add Your Question or Comment (10 Comments)

1. My Journey:

   June 5, 2009 at 11:10 am

   I really think the most important thing here is to stop using the CC! From the moment the Wife and I made that decision the debt has seem to fall to the waste side.
2. Curt:

   June 5, 2009 at 12:19 pm

   I agree, but the factionary reserve banking system that we have depends on loans to increase the money supply. It’s like a juggling act. The banks need to keep the balls in the air to keep the act going.

   Therefore, as less people borrow money the banking system will continue to struggle – which is fine if your not a banker. But, then again the fed has stepped in to spend in place of the people in order to keep the balls in the air.

   The act is almost over and the balls will soon be hitting the ground. We as a nation need to desperately get out of debt as soon as possible before the world lets the dollar sink.
3. Mikael:

   June 7, 2009 at 4:17 pm

   What is your view on “good debt” meaning debt that you invest in order to increase you monthly cash flow? Wouldn’t it be relevant to divide “debt” into two different categories (bad=consumption and good=investing)?

   /Mikael
4. DDFD:

   June 8, 2009 at 8:35 am

   Very solid advice– for some, easier said than done. However, you have to start somewhere! It is amazing what you can do when you issue a spending halt . . .
5. Pinyo:

   June 8, 2009 at 10:43 am

   @Mikael – I have a post about it. Basically, the concept of good debt and bad debt is no longer relevant once you acquire them. Once you are in debt, all that matter is expensive debt versus cheap debt. For instance, I would get rid of good debt with an interest rate of 10% before I get rid of bad debt with an interest rate of 4%.
6. Mikael:

   June 8, 2009 at 12:15 pm

   @Pinyo, and that is a good point but why would you want to ever get rid of good debt?

   If I could make more money by using other people’s money I would any day.

   /Mikael
7. Pinyo:

   June 10, 2009 at 3:13 pm

   @Mikael – I hear what you’re saying and if I can borrow at 5% to earn 10%, I would do it. However, these deals are pretty hard to come by, especially now.
8. Mikael:

   June 10, 2009 at 3:56 pm

   I’ll have to disagree with you. Yes it can be difficult to get a loan but because of this there is also so much more opportunities out there since the amount of competition has declined.

   With a lack of competition prices drop and even more money can be made. Sure you can’t borrow from a bank and put money into another bank and hope to make a profit but who says anything about earning interests?

   There are hundreds of ways to make a lot of money using other peoples money and one of the most obvious is to buy real estate in these declining markets.

   Yes you will know what you’re doing but that goes for EVERY investment available.

   Buying rental property cheap and renting it out (which is also a lot easier in a market where people can borrow money to buy) can be a very lucrative business.

   What I suggest that people do is find someone that is successful TODAY and learn from them. There are lots and lots of money to be made but you might want to change your approach and not rely on “everything going up by default”.

   /Mikael
9. Pinyo:

   June 11, 2009 at 9:43 am

   @Mikael – Of course. I wasn’t even thinking real estate when I was answering your original question. If your finances allow it, this is probably as good a time as any to invest in real estate and leveraging other people money to build wealth.
10. Prime Targeting:

    July 23, 2009 at 1:16 am

    Thanks for sharing such great post, according to me after getting out of the debt trap you’ll be tension free, but for that you have to list out your expenses and try to remove all that which are not necessary. On the other hand you can find some other way to earn extra income and save it in safe manner. By following all this ways you can boost your credit score and get out of debt.