How to Pay Off Debt: 10 Ways That Work

If your debt is increasing, know that it isn’t just you. Unforeseen circumstances can saddle anyone with debt at moment’s notice.

There’s plenty of events you can’t control, like the loss of a job, medical bills or unexpected expenses. We’ll show you how to pay off debt with ten simple strategies.

Although it can feel daunting, you can tackle it. Yes, you’re up to the challenge to pay off your debt. With a little grit and planning you can do it. Here’s several debt payoff methods you can follow.

1. Curb your spending

Changing your spending habits can push you outside your comfort zone, but it’s one essential step you need to take to become debt-free. To get started, develop a good idea of the amount you’re spending on fixed and variable expenses.

• Fixed expenses: You likely already have a pretty solid idea of what makes up your fixed spending. This category includes your car payment, housing costs, and so on.
• Variable expenses: These expenses, on the other hand, are more discretionary, and include pretty much everything else that you buy. Like your morning coffee, or the online shopping you did the other day.

Subtract your fixed monthly bills from your monthly income. The amount that’s left needs to cover all of your monthly variable expenses.

Identify your variable expenses

Figure out how you’re spending your money in a given month. Your bank and credit card statements can help you identify where you can cut unnecessary (variable) expenses.

Group the numbers into categories such as entertainment, eating out, etc. and rank them from high to low. Look at the categories accounting for 80% or so of your spending and zero in on these.

Focus on needs not wants

Make a distinction between expenses that represent wants and those that are needs. Wants are usually more expensive, unnecessary things you can (and should) do without to control your spending.

The following table illustrates the difference between these two types of expenses:

2. How to pay off debt with a budget

A budget acts as a roadmap to guide you in your debt reduction journey. It’ll add discipline to your spending and help you get rid of your debt.

With a budget, you list the amount of money you’re going to spend on a number of items in a given period of time to accomplish a goal. In this case, paying off debt. Get it started by creating a spreadsheet that lists your monthly fixed expenses first, followed by your variable expenses.

Add a “debt repayment” line to your budget.  That’s the fixed amount you’ll aim to set aside each month to tackle your debt, and should equal the difference between your income and the sum of all your expenses. Your actual debt repayment amount will change month to month, since your expenses are likely to bounce around.

» Further reading: Develop a debt repayment budget with our Shed Debt Faster guide.

After you’ve eliminated any extras and curbed your spending, you should have some cash in excess of your monthly expenses.  If that’s not the case, you’ll need to look for ways to cut back expenses.

3. Cut back expenses

After bringing your spending under control, take a closer look at your expense list. Put it under the microscope to look for ways to reduce each item as much as possible.

One way to start is by questioning the need of each expense. Here’s a simple set of questions to ask yourself regarding each item:

1. Test it: Ask yourself whether you can do without the expense altogether. For example, do you need to have both Netflix and Prime Video?
2. Scale it down: If you can’t do without an expense, are you able to do without it partially? For instance, can you cut back your Netflix to one screen instead of 2 or 3?
3. Replace it: If you can’t do without an expense partially, focus on reducing its current cost by finding a cheaper alternative. For example, can you settle for a Roku streaming device instead of Netflix and Prime Video?
4. Repeat: Go through all of your variable expenses and test them the same way.

If you’ve reviewed and cut back expenses to their minimum and you’re still coming up short, you’ll need to look for ways to increase your income.

4. Make extra money

You can only cut back expenses up to a point. So if you’re not freeing up enough cash, you’ll need to find ways to increase your income.  Here are some ideas you can try to take in more money every month.

» Find a part-time hustle. If a second job is not an option for you, check out these 23 Smart Ways to Make Money From Home and find a part-time hustle.

» Negotiate a raise. If you’ve been performing at work, but haven’t had a raise in a while, ask for one.  It’s a win-win for you, no matter the outcome. If you get the raise, great; if you don’t, then at least you’ve learned that perhaps it’s time to look elsewhere for a position where your skills will earn you more.

» Extend your work hours. If you’re paid on an hourly basis, look for extra hours and work overtime, whenever possible.

» Find a higher-paying job. You owe it to yourself to make sure you’re being paid competitively. If you aren’t, look elsewhere.

» Sell spare assets. Selling a spare asset won’t increase your monthly income, but it’s a fast way to help you raise cash to pay down debt.

» Downsize. If you rent your home, consider moving to a cheaper place when your lease is up for renewal. If you own, and depending on your financial situation, selling and then buying a cheaper place to free up cash and pay down debt might be an option.

5. Prioritize debts

Going through your debts all at once is never a pleasant exercise. So it wouldn’t come as a surprise if most people don’t know how much they owe.  But knowing what you owe in detail is a necessary key step to get out of debt.

Know what you owe

Open a spreadsheet and make a list of all your debts. Include all your credit cards, store cards, car loans or leases, your mortgage, personal loans, student loans and any other debts you may have.

Find the most recent statement for each account and identify the following information:

• The amount outstanding,
• The rate or APR you pay,
• Your minimum payment due, if it’s a credit card,
• The monthly payment due if it’s a loan

Rank your accounts by APR and note which ones come out on top.  Next, rank them by amount outstanding and note the ones with a small balance. This information will come in handy when you set up your repayment plan.

6. How to pay off debt: Repayment methods

Credit card debt likely came out on top on your APR ranking, above. In general, if you pay off credit card debt first, you can save more money given their higher rates.

Debt avalanche method

If you start paying off your debts by focusing first on the accounts with the highest interest rates, you’re said to be using the debt avalanche approach.

With this method, you pay the minimum amount due on all of your accounts, and any cash left over is earmarked to paying down the account with the highest interest rate. Once that’s paid off, you move on to the account with the next highest interest rate, and so on.

Debt snowball method

For some, the feeling of accomplishment that comes from paying off accounts faster is more important. If crossing out accounts faster is more appealing to you, the snowball approach might be right for you.

You’re using the snowball method when you choose to pay off the account with the lowest outstanding balance first, regardless of its interest rate. You’ll still be paying the minimum amount due on all of your accounts, but you’ll use any remaining cash to pay down the account with the smallest balance. After the smallest balance is paid off, you move on to the next smallest balance and repeat the process with the remaining accounts.

You can’t go wrong with either repayment strategy. Choose the one you believe will keep you motivated to pay off your debt.

7. Earn cash back whenever you spend

Regardless of how much you cut back your spending, you’re still going to have expenses. You might as well get cash back when you spend your money. A cash back credit card can help you with that.

Cash back credit cards

Cash back credit cards pay you a percent of the amount you charge as cash back. They typically pay the accrued cash back as a credit to your account.

The reward percentages generally range from 1% to 5%. While some cards will offer you higher percentages in categories they specialize, others will earn you more by enrolling in or activating quarterly rewards programs.

» Related: This cash back credit cards comparison tool can help you find the best card for you.

Cash back shopping

Shopping through a cash back app or website makes it simple to earn easy, passive money.  Rakuten (Ebates), TopCashback, Dosh and BeFrugal are free legit alternatives that will pay you cash back on your shopping.

When you shop through a cash back website, online stores pay a commission for referring you to them. The cash back website shares this commission with you as a cash back rebate.

8. Use balance transfers to your advantage

If you have good credit, you may qualify for a 0% APR balance transfer credit card. A balance transfer card can cut down your interest expense during its promotional period and help you pay down debt sooner.

Avoiding interest helps you pay off debt faster because:

• Your balance doesn’t compound, and
• The money you used to spend on interest can be used instead to pay down principal.

Your transferred balance will stop growing because interest won’t accrue during the introductory offer, and you can use the money thus saved to tackle your outstanding balance faster.

When using balance transfers, only transfer amounts you can pay off during the introductory period to avoid interest charges.

» Related: You can easily compare balance transfer credit cards with this simple tool.

9. Consolidate debt

When used to consolidate debt, a personal loan can save you money and ease your financial burden. You may be able to consolidate several payments into a single, affordable payment.

For example, paying off expensive credit card debt with a personal loan may save you on interest and help you get out of debt sooner. A personal loan amortizes, so by the time it matures, you’ll have paid it off in full through your monthly payments.

To find out if a personal loan will help you save money, follow these simple steps:

• Review personal loan offers to get an idea of the terms available to you
• Find out the amount you can pay consistently every month to repay the loan
• Use a payoff calculator to estimate potential savings

» Further reading: Learn if a personal loan can save you money with our Complete Guide to Personal Loans.

Personal loans come with a monthly payment that may be within your budget. This added predictability in your payments, and knowing the payoff date on your loan can help you get a better handle on your money.

10. Consider debt counseling

Sometimes your financial burden can be too much to handle on your own. If you have debt in collections and budgeting hasn’t helped, a credit counselor can offer relief.

Credit counseling organizations offer a range of services from debt management plans to budget counseling and are typically non-profit. But beware of these services, though. According to the Federal Trade Commission, their non-profit status doesn’t guarantee free, affordable, or even legitimate services.

Before you sign up with any debt relief service, ask them to explain all their fees and conditions in advance.

Bottom line

Getting out of debt can feel like a long, arduous process, but it’s an important, worthwhile step to improve your financial well-being. Tackle it sooner, rather than later, and consider the following strategies:

1. Curb your spending
2. Create a budget
3. Cut back expenses
4. Make extra money
5. Prioritize debts
6. Put together a repayment plan
7. Earn cash back whenever you spend
8. Use balance transfers to your advantage
9. Consolidate debt
10. Consider debt counseling