With the notion of the American dream always looming, it’s easy to fall into debt trying to attain it.
That’s why it’s not shocking that Americans have more than a trillion dollars in credit card debt and auto loan debt and nearly $15 trillion in mortgage debt. More than 44 million people have student loan debt.
Getting out of debt is usually more complicated than getting into debt. And it feels like it takes forever.
The standard student loan repayment plan is 10 years. It’s about the same timeline if you have $15,000 in credit card debt with a 17.00% interest rate and pay $260 a month.
But who doesn’t want to get out of debt faster? That’s why we tapped several financial experts to find out their top tips for becoming debt-free (or close to it) in five years. Here’s what they had to say.
1. Negotiate with debt collectors
No matter what type of debt you have, chatting with the companies that you owe money is a great way to start lowering that amount.
“Many credit card companies will be willing to put you on a five-year fixed-rate plan if you request it,” said Ash Exantus, director of financial education and financial empowerment coach at BankMobile. “This is a great option because it allows you to know exactly what you need to pay on a monthly basis with no surprises.”
The same can be done for student loans. If you have federal loans, you have a choice of repayment plans that suit your financial situation, including income-based ones.
With medical bills, you can try negotiating with the doctor or hospital about your bills. Even if it’s a utility bill, talk to the company to see what can be worked out. You could knock hundreds to thousands off what you owe.
But there are some caveats to consider. Most credit card companies will request that you close your card to get the five-year plan, according to Exantus, which might have a negative impact on your credit score.
Certified public accountant (CPA) Michael Eisenberg, a member of AICPA’s National CPA Financial Literacy Commission, warned that forgiven debt could be subject to income taxes just like your paycheck because it’s considered income. So, it might make sense to talk with a CPA.
2. Consolidate your debt
Besides talking to the companies to which you owe money, you should consider debt consolidation.
“Getting a debt consolidation loan can be helpful if you have accounts with high interest rates,” said Sean Fox, debt expert and co-president of Freedom Debt Relief. “These loans, available from independent lenders, often have lower rates than credit cards along with a strict payment schedule that keeps people on schedule for paying off the debt.”
Consolidating high-interest debt into one monthly payment with a lower interest rate can save you money in both the short and long run. You could wind up paying less every month, and you’ll pay less in interest.
For example, if you have $10,000 in credit card debt at a 15.00% interest rate and are making monthly payments of $220, it would take you five years and seven months to pay off the debt.
By consolidating that debt into a personal loan with a 10.00% interest rate, you would pay off that amount seven months faster, pay only $212 a month, and save nearly $2,000 total in interest.
3. Adjust your budget
The next step after seeing if you can lower your debt upfront is to rework your budget. This will help you determine where you’re overspending, where you can cut back, and how much more money you can put toward aggressively paying off that debt in five years.
“Dig deep into the various lines on your budget and look for ways to reduce expenses,” said financial blogger David Bakke. “You can use an online resource such as Mint, an Excel spreadsheet, or even pen and paper to get an idea of where your money goes each month.”
Figure out your fixed costs (mortgage, rent, utilities, etc.) and where to reduce your spending as part of your debt-reduction plan.
“Believe it or not, there are plenty of ways to save on things like utility bills and gas for your car and even subjective spending categories like entertainment,” said Bakke.
Here are some budget areas to reconsider:
Subscriptions and memberships: Netflix, newspapers, gym, etc. Take a look at what you pay for monthly in those areas and cancel them for easy savings.
Cable: If you’re paying $100, $200, or more for your cable or satellite TV service but you’re getting most of your content on the web, consider releasing yourself from the monthly charges that you might have signed up for years ago.
Credit card and bank fees: If you’re paying fees (look at your statement), shop around for no-fee credit cards and checking accounts.
Insurance: Look for lower rates on similar coverage for your home and car.
Once you’ve cut out all the necessary fat, you should have a monthly surplus in your bank account.
From there, build your road map. “Come up with a specific set of goals for paying off your debt, such as $200 every month or $3,000 per year,” said Bakke. “That surplus should be sent into your debt each month.”
Also, dedicate all your extra income toward your debt. This includes bonuses, raises, tax returns, wedding gifts — you name it. Use the extra income to attack your debt.
4. Choose a pay-down method
You’ve negotiated your debt, consolidated your remaining debt, and come up with a budget. Now you need to choose how you’re going to pay off that debt.
“Make an honest assessment of whether you can pay down credit card and other debt on your own,” said Fox. “Set an amount each month that you can allocate to paying the debt. This should be more than the combined minimum payments on all credit cards.”
He suggested choosing between two methods for debt payoff:
- Debt avalanche: Make minimum payments on each debt besides the one with the highest interest rate. For that debt, pay the minimum plus any more that you can. Repeat this process every month until that debt with the highest rate is paid off. Then, keep going with the same monthly total amount. But allocate the money you used to pay off the highest-interest debt toward the debt with the second-highest rate. Keep following this program until all debt is paid off.
- Debt snowball: Pay the minimum on all debt. Then, apply the remaining money from the monthly total you’ve allocated to the debt with the smallest balance. After that debt is paid off, continue paying the minimum on all debt and putting the remaining funds to the second-smallest debt. Many people are more successful with this method because of the satisfaction they get by eliminating an entire debt, one at a time.
5. Take on a side hustle
We have many success stories on our website of people revealing how they were able to tackle hundreds of thousands of dollars of debt in a handful of years. And a common theme among them was taking on a side hustle.
Grant Sabatier not only paid off $30,000 in debt in five years but also became a millionaire by taking on multiple side gigs besides his full-time job.
Kevin Han, creator of personal finance blog Financial Panther, tried nearly every side hustle available to pay off his $87,000 in student debt in under three years.
“Why shouldn’t I still find ways to make extra money?” he previously told us of why he works many side hustles while still being a full-time lawyer. “It only helps with future financial goals.” That financial goal could be paying off your debt.
Do everything you can to earn extra money. Driving for Uber, selling unwanted items on eBay, or delivering pizza are great ways to get extra cash to put toward that debt.
Get out of debt fast
Depending on how much debt you have, it can take time to pay it all off. But all these experts agree that if you take certain steps to work toward a debt-free goal, you can reduce that period significantly.
Five years is doable, but even if it’s a few more years, these tips will get you on the right path. If you still feel lost or are facing bankruptcy, consider hiring a credit counselor to help come up with a plan or look into a debt settlement company.
Once you’re debt-free, be careful not to go back into debt. Take time to think about your purchases and spending habits. Understand that no matter what method you choose, it will require change.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|