Solid Methodologies for Getting Out of Debt
In 2018, U.S. consumers hit a record high of revolving debt, more than $1 trillion. Revolving debt is debt that can be paid down, and then consumers can use again—like credit cards. For many people this ability to go back to the proverbial well gets them in trouble. They get in a cycle of spending and paying high interest rates for everything they buy that leaves them trapped. Fortunately, there are some solid methodologies for getting out of debt that are created or supported by people who have helped thousands change their financial picture, escape debt, and build more wealth.
Having a methodology to follow helps because it reduces the amount of work you have to do and the amount of self control you need to exert. Methodologies create financial habits that replace old, expensive habits. But whatever methodology you pick, experts all agree you need to:
- Create and follow a budget.
- Understand why you spend the money you spend and become more discerning about purchases.
- Create and use automatic savings vehicles including retirement accounts.
- Make an aggressive commitment to getting out of debt.
They also agree that having your finances under control feels fantastic.
This page only lists a few approaches, but here’s a long list of financial gurus and their resources.
Dave Ramsey's methodologies
Dave Ramsey is a household name in debt reduction. He advocates steps like theenvelope system—labeling envelopes “groceries,” “clothing,” “entertainment,”—and then putting the budgeted amount of cash in each envelope and only spending what’s in the envelope. The theory is you’ll be much more conscious of spending if you have a finite amount of actual green to deal with than if you use a debit card.
Ramsey’s methodology for getting out of debt and into financial freedom has seven Baby Steps:
- Save $1,000 for emergencies.
- Pay off all debt using the snowball method: paying the minimum payment on all debts, but adding any extra debt payoff money toward the smallest debt. This way, you pay the first debt off relatively quickly and roll that debt’s payments into the next smallest debt, until they are all paid off.
- Save 3-to-6 months of expenses for emergencies.
- Invest 15 percent of household income into Roth IRAs and pre-tax retirement funds.
- Save for your children’s college.
- Pay off your home early.
- Create wealth and give.
The snowball method is a signature for Ramsey because, while it leaves the largest debt—with possibly the priciest interest rate—for last, he believes it provides the best motivation to keep going. And by the time you get to that whopper debt you’ll have a habit of paying off debts — and plenty of money to throw at it.