Debt is a scary thing. It can destroy you financially and mentally, taking a toll on your emotional well-being. However, there are two ways to approach this monster.
Number 1: Ignore your growing mountain of debt, maybe make some more, and put off dealing with it for another day.
Number 2: Deal with it now, head-on; no more denial.
The great thing about option number 2? If you take it one step at a time, you can be 100% debt free. Are you ready for some debt relief?
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How To Pay Off Debt When You're Broke
Disclaimer: I am not a financial advisor. All information found here, including any ideas, opinions, views, commentaries, or suggestions expressed or implied herein, are for informational or educational purposes only and should not be construed as personal financial advice.
1. Stop Making More Debt
This seems like a no-brainer, but it needs to be said. Don't open new credit cards or apply for loans to pay off existing debt. You'll just be shifting debt around and doing the opposite of paying off debt...and that's not why you're here!
A word of advice - cut up your credit cards. If you do not have the discipline to avoid using them, take the temptation away and destroy them.
2. Figure Out How Much you Owe
We've all been there, ignoring bills that keep coming. Think of it this way - it already exists; whether or not you look at the numbers, your debt exists. Let that sink in.
Now, open your mail and look at the numbers. It won't get more when you look at it - whew! You have to know how much debt you have to know how much you need to pay off, right?
Make a list of outstanding:
Credit card bills
And any other debt you might have.
Next to the principal balance, write:
The interest rate
Any possible penalties you might have to pay
Now you have a clear picture of your debt. Panicking a bit? It's okay; we all get a fright when faced with our demons. So take 5 minutes, and go scream into a pillow.
3. Create a Budget
Do you know how you're spending your income? In detail?
How will you know how much you can push toward paying off debt if you have no idea where your money is going?
Enter, a budget.
Check out these easy ways to budget if you have no clue where to start. Once you've figured out where your money is going, you can figure out where you can save a bit.
4. Pay Off the Smallest Debts First
Some people won't agree with this; they'd want you to pay off your high-interest accounts first, which has merit. But getting out of debt on a low income is not easy; that's why you must use some psychological tricks on yourself.
The one we're employing here celebrates the small successes, also called the snowball method.
Here's how it works from your list made in Step 2:
Pay off your smallest debt as quickly as possible.
Use that same amount of money to start paying off your next-smallest debt.
And repeat. And repeat.
Important: Keep paying the minimum repayments on your other accounts; getting penalties on missed payments will only add to your stress.
Crossing off one creditor at a time is immensely motivating and makes you tackle your next one with loads more confidence. In addition, you're much more likely to keep paying off your debt when you can see your creditors visibly reducing.
5. Use Savings to Pay Down High-Interest Debts
This one seems scary. We can do the maths on it, though. If you have a high-interest debt account that racks up more interest than what your savings accrues, doesn't it make sense to use some of your savings to pay off this debt?
Example: (these numbers are in no way accurate, but they illustrate my point visually.)
High-interest debt account - charges 15% interest.
Savings account - accrues 6% interest.
Looking at these numbers, you're losing money because you're being charged more than you make, right? If you use some of your savings to pay off the high-interest debt, you're eliminating the high charges and can focus on building your savings again, where you earn interest rather than being charged interest.
Important: Don't use all your savings. Be smart about this, punch some numbers, do more research, and be sure how much you can afford to use.
6. Negotiate a Lower Interest Rate
You'll be surprised how many creditors will be willing to listen and reduce your rate. Of course, they still want your money; they'll try accommodating you to keep getting paid. There are many great articles on negotiating a lower interest rate; I'd suggest reading some, taking notes, and practicing aloud.
Me? I do not enjoy negotiating, debating, or any form of communication where I need to convince someone of something. What I have found, though, is that it's usually much scarier in your head than in reality.
And it helps a lot if I've prepared before the time, practicing for all the possible curveballs.
7. Use your Tax Refund/ Bonus Check to Pay Off your Debt
I get it; you deserve to spoil yourself and spend the money how you please!
You'll have to weigh the benefits of a lighter debt load with the short-term satisfaction of spoiling yourself.
8. Ask for a Raise
What's the worst that could happen? They can say no? You can survive a no.
But don't be silly now; asking for a raise needs to be done with the correct numbers, statistics, and accomplishments you can back up with data.
When you get your raise, keep living on the same budget as before and push the extra money into paying off your debt.
9. Look for Ways to Earn Extra Money
Start a side gig, get a part-time job, or find remote work you can do in the evenings. With the internet at our fingertips, endless opportunities exist to make extra money.
The catch? Every single one will require time and effort. So learn to maximize your free time and add that extra cash toward paying off your debt.
Dog-sitting/ pet sitting
Sell digital products online (Etsy)
Sell things you no longer need (Facebook Marketplace, Craigslist, etc.)
Waiter on the weekends
Restore furniture and sell it for a profit
10. Find Ways to Save Money
It's as easy as you decide it's going to be.
11. Use a Statute of Limitations Law to Eliminate Old Debt
There is a time limit when your debt collector can file a lawsuit against you to get their money back.
Each state has laws regarding this; find out the laws that apply to you and take them from there. Forbes has good literature on this - easy to understand and informative.
11. Say No
Say no to spending unnecessarily. Say no to spending to impress other people. Say no to spending because you're afraid of missing out. Nobody cares about your life as much as you do. Nobody will give you handouts (at least not for long) because everybody has their own lives to take care of.
Find a friend, partner, or family member to hold you accountable. Give them permission to punch you in the rib if you start throwing your toys out the cot 'cause you also want to buy things.
The Bottom Line
Nobody is saying this will be easy. You're going to have to make sacrifices, you're going to miss out on fun experiences, and you're going to cry in the shower more than once. Accept that, make peace with it, and get on with it! Decide you'll get ahead of your debt, and you've already won half the race.