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How to Get Out of Debt: A Step-by-Step Guide


After getting married, Vanessa and I decided to jointly manage all of our financial resources, including $25,000 of student loan debt. After almost a year of hard work and dedication, we submitted the last payment and completely eliminated our debt.

I still remember the excitement that we felt after submitting our last student loan debt payment. It was such a liberating moment in our life, and we want the Cash Cow Community to feel that same joy and freedom. To help you get started, we put together this comprehensive guide to getting out of debt quickly.

How to Eliminate Your Debt

1) Figure out your motivation

Getting out of debt is an important financial goal that can require hard work and dedication. Are you willing to make sacrifices to crush your debt? Do you know why you are in debt now, or why you want to become debt-free?

These motivational questions might sound gimmicky, but they are important. If you aren’t fully committed to changing the behaviors that got you into debt in the first place, you shouldn’t waste your time with the remainder of this article because your success will be limited. You have to truly want it, desire it, and be willing to work for it.

For us, the motivation was (and is) financial freedom. After getting married, our desire for financial flexibility (no debt) was much stronger than our desire to consume or purchase new things. This motivation encouraged us to permanently change our spending habits. We stopped purchasing unnecessary things, embraced a minimalist lifestyle, and began saving a large percentage of every paycheck to eliminate our student loan debt.

What is your motivation to become debt-free, and do you want it badly enough to make sacrifices?

2) Figure out how much you owe

In developing a plan to repay your debts, you must know the total amount owed. To get started, you should collect the following pieces of information:

  • The type of debt
  • The amount of each debt
  • The interest rate on each debt
  • The minimum monthly payment required

You are legally entitled to this information, and you can call or email each creditor to obtain the most recent numbers.

You can store this information in a simple spreadsheet or a free Excel calculator (which I’ll describe later in this article).

3) Automate minimum payments

To begin the debt repayment process, you should create a system that automatically pays the minimum amount due on each of your debts.

The easiest way to do this would be to create a recurring transfer from your bank account. For example, Discover Bank allows free ACH bill payments and recurring transfers.

Creating this system does several things for you:

  • Lessens the mental math required each month because you don’t have to think about each payment.
  • Removes the possibility of late payment penalties.
  • Improves your credit score each month.

Be sure to store the minimum required payment for each debt in your Excel spreadsheet.

4) Track your cash flows

Now that you are paying the minimum required amount each month, it’s time to formulate a plan for paying down that debt quicker.

The first step of accelerated debt repayment is figuring out how much money you have available each month. The easiest way to accomplish that is by creating an account at Personal Capital. After securely connecting your financial accounts, Personal Capital records all of your income and expenses in real time. If that doesn’t work for you, you can create a traditional budget instead.

The method isn’t that important. What matters is tracking your income and expenses so that you know how much money can be allocated to your debt repayment plan. Armed with this information, you might be able to reduce unnecessary expenses each month, creating additional cash flow that can be used to accelerate your debt repayment schedule.

5) Create an emergency fund

An emergency fund is a cash reserve, often set aside in a checking or savings account.

The last thing that you want is to charge a major expense on your credit card, racking up more high-interest debt. An emergency fund will allow you to handle any unforeseen expenses that arise without falling deeper into debt.

$1,000 is a good place to start, but you can continue building your emergency fund until you reach a balance that makes your comfortable.

6) Destroy your debt

If you have several different types of debt, with each carrying a different interest rate, how do you decide which debt to pay off first?

Well, you have two options:

  • Debt Avalanche – Eliminate the debt with the highest interest rate first. When that’s finished, tackle the next highest interest rate.
  • Debt Snowball – Eliminate the debt with the smallest balance first. When that’s finished, tackle the next smallest balance.

From a rational perspective, the debt avalanche method always makes more sense. By paying off your highest interest rate debt first, you minimize the amount of interest paid.

From a behavioral perspective, the snowball method makes sense. You will pay more interest each month during the repayment process, but paying off those smaller debts encourages you to keep going until all debts are eliminated.

It’s also possible to combine the two approaches. For example:

  1. Continue paying the minimum amount required on all debts.
  2. Make larger payments toward any smaller debts that could be eliminated in a short period time (define short however you would like. For example, 6 months).
  3. After eliminating smaller debts (providing additional motivation to continue), shift your focus toward the debt with the highest interest rate.
  4. Continue paying off the highest interest rate debt, one by one.

7) Consider using a debt repayment calculator

There are some excellent free calculators available to help you decide between the debt avalanche, debt snowball, and other custom repayment methods.

When you download the Vertex Excel calculator that I’ve linked above, notice the various features that are available. You can input each debt, the interest rate, required minimum payment, etc. In my example, I have four debts listed. The total debt is $19,800 and the total required minimum monthly payment is $290 per

This calculator allows you to specify your preferred payment method and the total monthly payment amount. When tracking your income and expenses, you can determine the appropriate total dollar amount that you can afford to put towards repaying your debt. I’ve specified a total monthly payment of $450. Given the $290 required minimum payment, there is $160 available to put toward the snowball method or avalanche method.

To compare your repayment options, you can select debt snowball, debt avalanche, or a customized method created by you. By switching between each repayment method, you can visually see the total interest paid, and the date of repayment for each debt.

If I choose the debt snowball method of repayment (paying the lowest balance first), you can see that I will pay $6,032.70 in total interest. The final debt will be repaid in September of 2021.debt-snowball-method

If I select the debt avalanche method of repayment (paying the highest interest rate first), you can see that I will pay $4,765.77 in total interest. The final debt will be repaid in June of 2021.debt-avalanche-method

If I’m able to find an additional $100/month to put towards repayment, the total interest paid decreases to $3,589.08 using the avalanche method. Furthermore, the final debt is repaid an entire year earlier – in June of 2020.get-out-of-debt-fast

This difference in total interest paid highlights the difference between choosing the rational method (avalanche) and the behavioral method (snowball). What’s also interesting to note is that the avalanche method will almost always shorten the amount of time required to become debt free.

Becoming debt-free is the ultimate goal here, so choose the method that will keep you motivated to destroy your debt.

8) Revisit your spending habits

With a plan in place, you should continually monitor your income and expenses. In doing so, you can begin making changes that will increase your available cash flow, enabling you to make bigger payments toward your debt. Bigger debt payments will reduce the time it takes to become debt-free, and reduce the amount of interest paid on each debt.

Sometimes cutting expenses is the easiest way to begin. Here are some ideas that can help get you started:

While you are cutting expenses, you can also begin thinking about ways to increase your income:

  • Sell extras on Craigslist
  • Negotiate a higher wage at your job
  • Begin searching for a higher paying job
  • Start a business on the side (for example, a blog)

9) Share your story

Becoming debt-free is much easier if you have a support group encouraging you. Being able to share the trials and triumphs is a crucial part of the process.

Maybe you can share your debt repayment plan with family or close friends. Sharing your journey will also allow you to suggest cheaper entertainment options, such as potluck dinners and Amazon Prime movies at home.

If you are currently working on paying off your debt, please leave a comment below. We would love to hear about your progress.

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