Taking Control of Your Debt: A Guide to Financial Wellness
Debt is heavily woven into American culture. Research indicates that approximately 77% of Americans carry some type of debt.
Debt is viewed by many as something to be avoided and based on the data, that’s hard to argue against. However, with the price of housing and the way our society functions, debt can be extremely hard to avoid in our modern world.
The truth is that debt is a tool, by itself it is neither good nor bad. Like a hammer, in the right hands and with the right strategy, it can help you build the life you desire. Misused or with misfortune, it can cause great damage.
Let’s focus on some practical steps to effectively deal with your debt in an attainable, empowering way.
Step 1: Understanding Your Debt
Before you can manage your debt, you need to understand it. Debt comes in many forms—credit cards, student loans, car loans, mortgages, personal loans, etc. Some debts, like mortgages, are often considered “good debt” because they can lead to long-term asset growth. Others, like high-interest credit card debt, can quickly spiral out of control.
To get a clear view of your situation, list and organize all your current debts. Details should include:
Creditor’s name
Total balance
Interest rate
Minimum monthly payment (where applicable)
Expected Paid-In-Full Date (if applicable)
This exercise may feel overwhelming at first, but it’s a crucial first step. With clarity comes power and control. For future ease and access, consider building this list in a database like Excel or another user-friendly tool.
Step 2: Assessing Your Budget
The next step to managing your debt is to understand your expected cash flow. You will need to create a monthly budget that outlines:
Your income sources – including timing, amounts, and stability
Fixed expenses (e.g., rent, utilities, insurance)
Variable expenses (e.g., groceries, entertainment, dining out)
Needs (Necessities) vs. Wants (luxuries)
Debt payments
Savings/Giving Plans (though with large debts this should often be minimal)
Once you’ve mapped out your budget, prioritize your expenses and look for areas where you can cut back. Things like cooking at home instead of dining out, renting out a room in your house, reducing entertainment subscriptions, and more all help create more available dollars. Resources on frugality and financial independence can help spark ideas. Your speed of debt payoff will be heavily affected by your commitment and desire to be out of debt.
Step 3: Prioritize Your Debts
Not all debts are created equal. Just like the exercise in Step 2 of prioritizing your expenses, to build momentum around debt payoff, you need to prioritize your debt payoff based on interest rates and urgency. The two most common approaches are:
The Avalanche Method:
Focus on paying off debts with the highest interest rate first while making allowed minimum payments on the rest. This approach minimizes the total interest you pay and is most financially advantageous.
The Snowball Method:
Start by paying off your smallest debt balances first to gain momentum and psychological wins. This method is particularly effective if you’re motivated by seeing quick progress. This is considered the more emotionally encouraging option.
Either method will get you to your desired destination, so choose the method that resonates most with your personality and stick with it.
Step 4: Negotiate and Consolidate
Many people don’t realize that debt terms are often negotiable. If you feel overwhelmed by your current debt load or just want to explore your options, reach out to your creditors and ask about their options for:
Lower interest rates
Payment plans
Temporary forbearance or hardship programs
Make sure before agreeing to anything you understand how the action will be reported to the credit bureaus by the creditor. Some types of agreements (like debt settlements, bankruptcies, and occasionally debt management plans) negatively affect your credit score for a period of time.
If you have multiple high-interest debts, consider consolidating them into a single loan with a lower interest rate. Debt consolidation simplifies your payments and may reduce your overall cost. However, be cautious about taking on new debt to pay off old debt unless the terms are better. Moves like consolidations (or balance transfers) can end up hurting you more than helping if you aren’t committed to changing your habits.
Step 5: Build an Emergency Fund
It may seem counterintuitive to save money while paying off debt, but an emergency fund is your safety net. Without it, unexpected expenses like car repairs or medical bills could force you to once again rely on high-interest debt, keeping you in an unhealthy cycle. Aim to set aside at least 1 month worth of essential living expenses, then (once out of heavy debt) gradually build to three to nine months’ worth of living expenses. The right amount for you will depend on your unique situation and can be discussed with a qualified financial professional as needed.
Step 6: Automate Your Payments
Automating your debt payments ensures you never miss a due date, which protects your credit score and avoids late fees. Most banks and lenders offer automatic payment options, allowing you to set it and forget it. As a bonus, automating your savings contributions can help you stay disciplined with your financial goals and budget. Be sure to know when debt payments will come out to avoid overdrafts on your bank accounts.
Step 7: Celebrate Small Wins
Debt repayment is often a marathon, not a sprint. Celebrate your milestones along the way to stay motivated. Paid off your first credit card? Treat yourself to a small, budget-friendly reward. Paid off a large debt? Plan a day trip to celebrate (using savings, not debt). Recognizing and rewarding your progress helps keep you encouraged and focused.
Step 8: Avoid New Debt
As you work to pay down your existing debt, it’s essential to avoid accumulating new debt. This means:
Living within your means
Saving for big purchases instead of financing them
Using credit cards responsibly (or not at all, if they’re a temptation)
Adopting a debt-averse mindset helps ensure you don’t undo your hard work.
Step 9: Seek Professional Help
If you’re feeling overwhelmed, don’t hesitate to seek help from a financial advisor or credit counselor. These professionals can provide personalized guidance, create a debt management plan, and even help negotiate with creditors on your behalf.
When choosing a professional, ensure they are reputable. Look for certifications like Certified Financial Planner (CFP) or affiliations with organizations like the National Foundation for Credit Counseling (NFCC). There are also established nonprofits that exist to get people started on this journey for little to no cost.
Step 10: Look Toward the Future
Once you’ve successfully managed your debt, shift your focus to building wealth and achieving financial freedom. This might include:
Investing more in retirement accounts (401ks, IRAs, HSAs)
Saving for major life goals (homes, businesses, college, etc.)
Managing debt is just the beginning of your financial journey. With discipline, a plan, and the right tools, you can create a life of abundance and gain peace of mind.
Final Thoughts
Handling debt effectively isn’t about perfection; it’s about progress. By taking small, consistent steps, you can regain control of your finances and work toward the life you’ve always envisioned. Remember, you’re not alone—many people have faced and overcome similar challenges and there are a lot of resources out there to help you along your journey. With the right strategy, mindset, and support system you can experience fulfillment and financial freedom!