Money » Get Out Of Debt » How to Get Out of Debt By Developing Healthier Money Habits
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How to Get Out of Debt By Developing Healthier Money Habits

Many people are getting out of debt all the time. However, no one is saying that you’re going to get things done in just a single day. Here's a couple of ways to improve spending habits and help you to get out of debt.
Jack Wickens
Jack Wickens
Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

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Many people trying to get themselves out of debt, to save money and to spend less money.

Carrying credit card debt can significantly compromise your financial health. Unfortunately, many consumers do have credit card debt. In this chart compiled with 2020 Nilsen data, we can see that over time consumer debt has increased from $3.8 trillion in 1991 to $16.10 trillion in 2019.

However, the percentage of credit card debt remains relatively stable. It has only increased from 6.9% to 7.3% in the same time period. Of course, the amount of credit cards has increased, but as the percentage has remained fairly stable, it suggests that consumers are relying on other types of finance to manage their debt.

US Credit Card Debt as a Percent of Household Debt

The truth is, debt can occur for a number of different reasons, like overspending. When people try to get out of their debt it seems like that’s when life gets in the way and something comes up. But what if you could still manage your debt? In fact, a lot of people are getting out of debt all the time, and they can do it quickly too.

Now, no one is saying that you’re going to get things done in just a single day. Instead, you’re going to need to work on developing a lot of good habits, related to your motivation, your discipline and your follow through.

Spending better is going to make a big difference in how your money works for you. So let’s take a look at how to improve your spending.

What Are The Downsides of Unpaid Debt?

If you have unpaid debt you’re struggling to pay, you may wonder about what negative consequences can occur if you just forget about it. Unfortunately, this is a little like sticking your head in the sand. Just because you are not managing the debt, it doesn’t mean that it will go away.

Firstly, the missed payments will appear on your credit report, which will lower your credit score. If this is not bad enough, your creditors may also take steps to recover the debt. This can include measures such as selling the debt to a debt collection agency, which may harass you with phone calls or even doorstep visits.

Your creditors may also initiate a lawsuit, which could result in bank account levies or wage garnishment. So, it is crucial that you continue to manage any debt.

A majority of Americans have a plan to reduce their personal debts within specific timelines, based on a poll conducted by Northwestern Mutual. 45% of Americans expect to pay off their debt in 1 to 5 years, compared to 9% who expect to pay debts for the rest of their lives. 34% of the respondents expect to pay off their debt in 6 to 20 years. Only 12% of the respondents said that they do not know how long they will be in debt.Chart: Time Consumers Expect to Remain in Debt in the U.S. 2021

How Can I Get Motivated to Save?

Getting motivated to save is easy, it is staying motivated that is the real challenge. You may start your savings planning full of gusto to save a certain amount every month, but it can be difficult to stick to this plan, three or six months down the line.

To maintain your motivation, it is a good idea to have a plan. Have a set goal of what you are looking to accomplish. Are you planning on paying off a credit card by this time next year? Perhaps you want to save up a deposit to buy your own home within five years? These goals can help you to keep your eye on the price, but it is also a good idea to have some smaller treats along the way.

For example, if your credit card balance is down by 50% after six months, you’ll treat yourself to a fancy meal at a nice restaurant or buy a new gadget. Obviously, you don’t want to go overboard on your spending, but it can help you to stay motivated.

1. Don’t Borrow Money

Getting out of debt and build your credit takes time, but you can speed up the process if you’re willing to make some changes. What that means is you can’t sign up for yet another credit card and you can’t keep spending on credit to get things you want.

If you do these things you’ll be able to cut down on the debt you have because you’ll have more money to put toward that debt.

2. Understand Your Situation

If you want to get out of debt you have to know what you owe, but also who you owe it to and any interest you’re paying.

It can be difficult for those who do have a lot of debt to keep track of everything and to take a full financial tally.

One of the easiest ways to keep yourself from really focusing on the amount of debt you have is to hide behind the numbers. Not adding things up means you never know where you stand and that is a huge problem. Make sure you add up every type of debt you have from loans and credit cards to your home mortgage.

3. Keep Track of What You Spend

It can be easy to find a way to solve the problem in a temporary sense, by transferring balances or getting a personal loan, but understanding how you got to where you are is crucial.

Keeping track of what you spend and where you spend it is going to be the first part of the process. Get a book, an app, a piece of paper or something that you can use to account for everything. Some people find it difficult to track all their spending so if that’s use then use a debit card and check your statement frequently to get an idea of what’s going on.

When you know where your money is going you get a whole lot closer to being able to keep yourself on track.

Now it’s time to look at the most important questions:

When you’ve got an answer to both of these it’s time to look at your income and your expenses to start figuring out what happens next.

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4. Know Where You’re Financially Weak

What kind of things cause you to spend more money that you would like to stop? Talk with your partner or check out your bills to see where you’re spending a lot and then start looking for ways to cut those things down. Maybe you’re:

  • Eating out too frequently
  • Buying items you don’t even need
  • Getting involved in impulse shopping
  • Spending more than you should on sales

As you work through breaking the habits that you want to break you have to follow a simple two-step process.

  • Think about what type of habit it is you want to avoid.
  • Figure out how you’re going to cut out that habit and start a good habit.

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5. Create A Budget

Okay, so first you’re going to have to create a budget, but that budget is going to make a difference in tracking your spending and income. You’ll be able to figure out where you’re at now so you can keep moving forward in a positive way.

The important thing is to determine if you have a surplus or a deficit at the end of the month. That means, whether you have money left over or you’re spending more than you make.

  • Plan 50/30/20 ‍- It is not only one of the most popular strategies, but it is also one of the simplest because the instructions are literally in the name. After paying your bills, you should spend approximately 50% of your income on basic needs, 30% on “wants,” and 20% on savings.
  • Zero Sum Budget – This is a very detailed strategy. The term “zero-sum” refers to the fact that the amount of money you earn plus the amount you spend should be balanced and equal to zero at the end of the day. Every single dollar has a purpose in this plan.
  • The Envelope Method – The envelope system is a method of keeping track of how much money you have in each budget category for the month by keeping your cash in envelopes. By taking a quick look in your envelope at the end of the month, you can see how much money is left.

The Key of Budgeting: Increase Your Income, Reduce Your Cost

What you want to do is get as large of a surplus as you can and start paying down all of your debts. The best ways to do just that are here:

The first thing to do is to start making more money.

For those who make money on commission, you’d have to increase the number of sales that you have and you may need to work longer in order to get there. For those who have a salary wage, it’s not really possible to make more at that job (unless you’re offered paid overtime). That means you may need to get a second job instead.

The second option is, you guessed it, spend less.

If you’re trying to spend less you have to go through the budget you already have and see where you’re spending, then start working on ways to cut down. Maybe cancel some subscriptions or services. Maybe you could cut back on some of your discretionary spending like going out to eat. It’s going to be entirely up to you how much money you’re able to save each month because you’re the one who’s going to be making the final decision on just what to cut.

If you’re really committed you’ll be able to cut back on more of those things and start saving even more. Even better, maybe you can cut back on the cost without sacrificing the service, you won’t know if you don’t ask.

6. Have a Plan

If you want to do anything you’re going to need a plan. You can’t just jump in and expect things to work, so look for ways to make it happen. You may have to cut into your savings a bit to start paying down some of the higher interest stuff.

Also, you may have to use up some of your cash reserves so you can stop building up more and more interest. So, what’s the best thing you can do to pay off your debt? Make a plan. Here are two popular plans:

The debt avalanche – The debt avalanche is a debt repayment strategy in which debts are paid off in the order of their interest rate (from highest to lowest). It's worth noting that this has also been referred to as the “stacking method” and the “debt ladder.”

To be clear, when you use this method, you continue to make the minimum monthly payment on all of your debts, but you apply any extra funds to the debt with the highest interest rate. Once that debt is paid off, you repeat the process, moving on to the next highest interest rate. Continue doing so until you are debt-free.

The debt snowball – The debt snowball is a debt repayment strategy in which debts are paid off in decreasing order of size (from smallest to largest). Just as a snowball begins small and grows into something larger, you begin with minor debts and work your way up.

You make the minimum monthly payments on all of your debts and then apply any excess funds to the account with the smallest balance. Rep this process until all debts have been paid. As you pay off accounts, you eliminate monthly payments, allowing you to put even more money toward your next smallest debt.

7. Cut Spending

Everyone has things that they want. It makes us normal. But unfortunately, too many people decide to buy the things that they want even when they don’t have the money to do so. People like to buy what they want at the moment they want it and even millionaires can have trouble with that. The best thing you can do is not buy something new unless you can afford to pay for it outright.

For those who can compromise it’s a good idea to spend what you have to get something a little less and then work your way to getting what you really want. You may even find that by the time you have the money you don’t want whatever it was anymore.

If you use cash you also have a higher likelihood of not spending as much. If a customer spends with cash they’re likely to spend a whole lot less than with credit. When it comes to vending machines and tickets people are likely to spend MUCH more when they use credit versus cash.

For those who decide to make all of their purchases on a credit card this could add up to around thousands a year just so you can get some points or cash back. And most people only get a couple of hundreds in those rewards. If you don’t spend that much in a year you may not get as much back, but you can definitely see where the problems lie. Spending with cash is going to save you a small fortune.

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8. Start Spending Right

So, when you know what you shouldn’t be doing it’s time to start doing it right. You want to start making good habits a priority and that’s going to mean working on some of the bad things that you’re doing right now.

Learn What Triggers You

Are there certain places or certain people in your life that encourage you to spend more than you should? It might be a friend or family member you go shopping with who tends to talk about how you only live once.

Or maybe it’s a specific place you love to go to. No matter what it is, you want to avoid your triggers so that you’ll spend less. Look for ways to get the things you need (or spend time with those people) without that trigger.

Do Your Research

A lot of people like to impulse buy, even with larger items like a TV or even a washer and dryer. By doing your research you can make sure you get the best deal. By researching you slow down and make sure you actually need the item, and you get to compare the prices. That’s going to help you make a better choice.

Put Yourself on the Payroll

This point is all about making sure that you save money the right way. It’s not actually about making more money or getting a job.

What it means is making sure you put money into savings accounts, retirement accounts and more, before you start doing anything else with your money. In fact, you should follow this standard:

The best thing you can do to make sure you’re getting all of this taken care of is have someone that you’re accountable to. An accountability partner is someone that you can trust to talk about your financial goals and plans with and they should be someone who can keep you from spending money when you shouldn’t.

Don’t Get Emotional

According to neuroscientists, it’s actually a hugely emotional issue to make many decisions.

People make the decisions they do base on things like love, envy, sadness, vanity, guilt or fear. You may make decisions based on a number of different feelings or emotions.

In general, when you make an emotional purchase or a decision to purchase something with your emotions it’s not something you actually need. You’ve decided you want it because of something else.

What an emotional decision means is that you made an impulse purchase. You’re not making a long-term or urgent decision about something that’s necessary for your family or your future. You may not even look at the price or at any of the research. Instead, you buy based on what you want in the moment.

For a lot of people, things that show up on their social media tend to be emotional purchases, like hair vitamins or waist slimmers. They’re things that someone buys because of the emotional impact that they make at the moment.

9. Set Long & Short Term Savings Goals 

Setting savings goals, particularly if you intend to splurge on a major event – whether it's a vacation, retirement, or a wedding – is a simple yet effective measure because it gives you something to work toward.

Another method is to divide your objectives into short-term and long-term goals, which will allow you to track your progress on multiple levels. Short-term enterprises are typically goals that take one to three years to complete, such as purchasing a new vehicle. The latter refers to investments that last four years or more, such as a down payment on a house or saving for your children's education.

Setting smaller goals along the way, whether it's a new haircut or a birthday present, is a great motivator in the meantime. It not only reinforces money-saving habits, but it also allows you to reward yourself.

In this case, another way to save is to establish a retirement plan. Consider opening an IRA account if you don't already have one. 

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If you have credit cards, loans and other debt, one of the smartest ways to pay them off is to concentrate on paying the highest interest rate debt first. If you have a credit card with a 14.99% interest rate and a loan with a 3% rate, you’ll be paying far more in interest on your credit card, even if the outstanding balance is far lower.

While you continue to service your existing debt, aim to pay extra on your credit card. Once this is cleared, you will have far more funds to put towards your next highest interest debt account.

This is a tricky one. The chances are that your debt is attracting a high interest rate, so you may struggle to actually reduce the debt. However, if you don’t have any savings, if there is a financial emergency, you’re likely to put the purchase on your credit card and the whole cycle will start again.

So, for many people, the sensible approach is to try to do both. If you have $100 in your budget available each month, why not try to put $20 in savings and put the rest towards your debt.

Spending triggers are often tied to our emotions, so when we are feeling a certain way, we reach for our wallets and buy things. For example, if you’re feeling low, you may go out and buy something that makes you feel better. If you’re feeling jealous, you may spend money to “show” that person.

Your potential spending trigger may be different to other people, so it is important to identify what your particular spending trigger is, so you can spot when you are vulnerable and take action.

Generally speaking, bad spending habits are anything that encourages you to spend beyond your means. However, even if you are not particularly in debt, a bad spending habit could be compromising your future financial health.

These habits can vary from something small, such as buying an expensive coffee every day to larger impulse purchases. To determine if something is a bad spending habit, take a serious look at how much you actually spend.

Buying a fancy coffee every morning may not seem like much, but if you’re spending $3 every weekday, it adds up to $60 a month or a staggering $720 a year. So, if you’re struggling to budget and save for something, that seemingly innocent daily coffee is a bad habit.

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