How to Get Out (and Stay Out) of Debt

When you finally sit down and add up all the credit cards and loans, you may find yourself wondering:

“How in the world did this happen? How did I end up with so much debt?” and then eventually, “How do I get out of debt?”

There’s typically no simple answer as to why you now find yourself in debt.

• Maybe yours crept up on you over a period of time —a soft t-shirt here, a few happy hours there.
• Sometimes, it might sneak up on you like a sucker punch with surprise medical expenses.
• Maybe you weren’t paying attention to your spending habits, and it got a little out of control.

Perhaps you were paying attention, and it still felt out of your control. If only you could just find that pot of gold at the end of the rainbow…

So here you are, sitting in a pile of debt. It doesn’t feel good, and you want out!

Paying down your debt should be sustainable and humane. A lot of angry-sounding personal finance personalities will try to condemn you to a life of eating pre-packaged ramen noodles as penance for your past—and if you want to sprint to the finish line (and/or really like ramen), that’s an option! But it’s not a requirement. It’s not even necessarily recommended. You still deserve to enjoy your life. 

So, what should your debt payoff be? How about a reasonable debt repayment plan that you can stick to? A plan that allows for the little treats that sometimes sustain us is a plan you’ll maintain. That’s right—you’ll never hear us say, “Don’t get the extra guac.” Like the sound of that? Let’s keep going.

Along with condescending personal finance advice, there’s also a lot of potentially predatory “debt relief solutions” out there, which only adds to the confusion. The key to getting out of debt includes four steps and some commitment. Here’s what’s required:

1. Make a list of all your debts.
2. Cover your monthly expenses.
3. Save for non-monthly expenses.
4. Pick one debt to focus on.

It’s a simple list, but we never said it was easy. Let’s take a deeper dive.

Step One: Make a list of all your debts

Sigh. You’ve been dreading this one—we know. Take that fiery motivation in your belly and just do it.

Make a list of every debt. Include the balance, minimum payment, and interest rate. You can’t fight a fire until you know where it is, so this step is critical. Face the reality of your financial situation… and then change it!

It may be difficult confronting your debts head-on like this, but once you do, there will be no more worry about what may be lurking ahead. Once you’re in this position of power, you can begin strategizing.

Step Two: Cover your monthly expenses

“Wait, what?! I thought we were working on debt!”

Sometimes, people get so excited about going after debt that they throw too much money at making extra payments and don’t have enough left to live on. This typically leads to even more debt. It’s a stutter step in your motivation to keep going. Before you can dive head-first into paying off debt, you’ve got to make sure you’ve covered your monthly bills and expenses.

Don’t forget: this includes any minimum payments on debt. Minimum payments are monthly bills.

If you have your monthly bills and expenses covered, that’s going to make it crystal clear how much of that balance in your checking account is extra money that can be applied toward debt reduction.

“Now I can attack my debt, right?”

Patience, grasshopper. We have a very important step to tackle first, and it’s the one that people most commonly get wrong!

Step Three: Save for non-monthly expenses

Before you attack your debt, make sure to set money aside for your non-monthly bills and expenses. This means saving money for things like:

• Insurance premium
• Car repair
• Annual membership you always forget about
• Holiday spending

It’s possible that these expenses are what got you into debt in the first place. If you don’t have money for these things—car repairs, gifts for loved ones, etc.—you will have to borrow to pay for them.

By setting money aside for these things, you won’t need to borrow to pay for them, and you’ll keep your debt plan on track.

Step Four: Pick one debt to focus on

“Now can I attack my debt?”

Yes! The moment you’ve been waiting for! Let’s do it.

We recommend choosing your smallest debt as the one to blast into oblivion first. With your other debts, you’ll just continue paying the minimum payments. Why? It eliminates one debt quickly, frees up extra cash quicker, and gives you a quick psychological win—and friends—this is everything.

This approach is called the Debt Snowball Method. While there are other effective methods (we’ll get to those in a bit), this is the one we recommend with a gold star. Who doesn’t love gold stars?

Need some help brainstorming non-monthly expenses? We got you! Try our Non-Monthly Expenses template. You can import categories and targets right into your YNAB plan so you can start preventing future debt today!

We recommend the Snowball Method in debt payoff. Focus on the smallest balance first. The Snowball Method gives you some self-confidence and keeps your debt payoff momentum going.

In this chapter, we’ll dig into this and other debt payoff strategies.

The Debt Snowball Method

List your debts from the smallest balance to the largest balance and pay them off in that order, regardless of the interest rate. You’ll pay the minimum balance on every debt except the one with the smallest balance.

Picture your debt payoff as a snowball rolling down a hill, growing as it gathers more snow. Likewise, the amount of money available for debt payoff will grow as you pay off one debt and use the money toward the next debt.

The Avalanche Method

In the Avalanche Method, you list your debts from the highest interest rate to the lowest interest rate and work through them in that order. The Avalanche Method allows you to knock out debts with high interest rates sooner and pay less in interest overall.

This may offer a better pathway for someone with high-interest debt, especially if their debts share similar balances but vary in interest rates. In this case, individuals should prioritize paying off the high-interest debt first.

The Anger Method

Sometimes, there are certain debts that you hate to have in your life:

• The car payment on the vehicle that your ex drives
• A personal loan from your parents
• The credit card payment on that trampoline that blew away in a hurricane two months after you bought it.

If you have an emotional debt that makes you angry or a debt that harms your relationship with a friend or a family member, it may make sense to prioritize paying that down before others.

What about interest?

Many people think that the interest rate should be the only factor when deciding which debt to pursue. It makes sense, right? Paying interest feels like throwing money away.

We hate interest, too, but there are trade-offs to consider. Interest buys you time to free up cash, build savings, and break your reliance on debt.

That’s pretty valuable when you think about it.

Other considerations on debt payoff order

If you’re still not sure about your debt payoff order, consider the following factors:

Risk

‍All debt carries risk, but secured debts are arguably riskier for the borrower. For example, if you have a loan on the title of a car, your car may be at risk of repossession. A home equity line of credit holds your home as collateral. Credit card debt is typically unsecured, so the risk is lower.

High Minimum Payment

‍If a debt has a high minimum payment relative to its balance, it may be worth prioritizing to clear cash flow more quickly.

Debt Structure

‍Some debts carry negative outcomes if the loan is not paid off within an agreed-upon payoff period. You might encounter:

• “90 Days Same as Cash”-type loans with a higher interest rate after the promotional period
• Many balance transfer credit cards
• 401k loans often carry tax penalties if they are not paid off within a certain amount of time after leaving a job.
• Adjustable-rate real estate mortgages with a large balloon payment at the end of the term.

It may be worth paying these types of debts off first to avoid penalties.

Government Debt (back taxes)

‍In the U.S., the IRS is known to work with people to develop reasonable payment plans. However, if debt is not paid as agreed, they have extraordinary powers to seize property that other creditors do not have. Borrowers who owe back taxes to their government should consider prioritizing these debts.

If you’re still not sure at this point, just go after the lowest balance. Trust us on this one—it works. The most important thing is to pick one and start working on it.

What do I do when I pay off the first debt?

Hooray! You paid off a debt! Congratulations! You’ve picked the next debt on the list, and you’re ready to throw all your money toward debt #2. Right?

Almost! But not quite.

Pick Your Next Focus Debt

‍If you’re using the Snowball method, pick the one with the smallest balance. This is the easy and boring part.

The Payoff Pause: Decide What to Do With the Cash You Just Freed Up

‍Let’s say the payoff of debt #1 gives you $400/month back in your bank account. Friends, exercise that control. You freed up this cash for YOU.

Sure, you may decide to put some of it—or maybe all of it—toward debt #2. But stop and think: could that money offer more help somewhere else in your budget?

Maybe you’ve kept the grocery bill pretty tight while you worked on debt #1. An extra $50 for groceries could give you some breathing room. Take it. Cash gives you options. That’s the entire point.

Maybe your car is making a funky noise, and you’re thinking a pricey repair may be just around the corner. Budgeting a little more for repairs will help you sleep better at night, and you deserve a good night’s sleep. Begin budgeting $75 more toward car repairs.

Of the $400/month that you’ve freed up, you’re using $125/month for some breathing room. Let’s be clear: not only is that not wrong—it’s exactly what you should be doing.

That also leaves $275/month for debt #2 for a new payment of $375. That’s still awesome.

Hey—maybe you’ll decide that all those dollars can go to debt #2. That’s fine! Now that you’re back in control of those dollars, just make sure that’s an intentional decision. At the end of the day, making those intentional decisions gives you total control over your money.

If you are trying to free up money for your debt management plan or any category in your budget, there are only really two levers you can pull on:

• Spend less.
• Earn more.

It will always come down to those choices or a combination of the two.

How to spend less money

When you eliminate wasteful spending, those savings last forever.

Determine wants versus needs.

Make a list of all your expenses and divide it into two lists: one for wants, and one for needs. Creating a list can give you a framework of where to start cutting.

This exercise can also help you see where your money is going. You will probably uncover some spending that:

A) You didn’t even realize was happening, and

B) Isn’t that important to you.

That’s a win, any way you slice it.

Nine tips for cutting spending

Dining Out

People spend a lot of money on delivery or at their favorite restaurants. You could try a freeze on dining out completely or commit to scaling back to a weekly or monthly dinner out. Spending in this area can really add up, so don’t overlook it.

Spending Freeze

Are there some other areas where you could try a spending freeze? Can you go a few months without buying clothes? Pause spending money on media in general? Maybe you could cut out all non-obligatory spending for a short time. Want an added boost? Try the free More Money Challenge to gamify your spending freeze.

Negotiate Lower Interest Rates

Don’t be shy. Call your creditors and ask them for a lower interest rate, especially credit card issuers. This works more often than you may realize. You can budget any money not covering interest charges somewhere else or dedicate it to the debt you’re trying to pay off.

Cut Cable

Maybe you aren’t really watching as much TV as you used to, and you’re paying this bill out of habit. Can you let it go?

Eliminate Subscriptions

Make a list of all subscription services and decide if they’re worth keeping.

Borrow or Rent (things, not money)

Instead of spending money to replace something, can you borrow or rent for a while? This allows you to buy a little time.

Sell Some Stuff

Walk through your house or apartment and make a list of things you no longer use but could sell. It’s a one-time influx of cash, but it can generate some initial momentum.

Small changes add up quickly, but if you’re really looking to pay off debt fast, try these options:

Eliminate Your Car, or One of Your Cars

Do you need two cars more than you need to get out of debt? Could you get by with just one? Selling one car could improve cash flow quite a bit. You may decide, “No, we need both cars,” but it’s worth considering in the spirit of “putting it all on the table.”

Downsize

Can you move to a cheaper place? Do you have a larger home or more apartment than you need? If you can downsize, you may save on more than just the mortgage or rent—you may end up with lower utility costs and a shorter commute.

Get more ideas on how to spend less money!

How to earn more money

So you’ve sliced and diced expenses, and you still want more money to pay off debt faster. You’re considering a second job or a side hustle. Now it’s time to decide whether or not the trade-offs are worth it.

Some factors to consider when weighing a second job include:

• How much could you bring in by working more? If it’s only a few dollars, it may not be worth it.
• How much faster would it pay down the debt?
• What are the trade-offs? Will working a second job lead to less time with family? What other time commitments will you need to sacrifice?

Earning more means trading more of your time away for money. If you’ve evaluated your expenses, plan to cut spending first, and decide that it’s not enough, getting a second job or working more hours is the best next step.

Remember when we said you should save for expenses that haven’t even happened yet? You’re probably thinking, “Why should I set money aside for a car insurance bill due six months from now? I’ve got this debt pushing me around now!”

Hey, we get it. Let’s dig in on this a bit if you’re not yet convinced.

We need to focus on the habits, not just the goal

Let’s talk about weight loss. There’s a metaphor here—stay with me. Maybe you or someone you know has undergone a dramatic weight loss to shed 10, 15, 20 pounds or more. It’s incredible.

How often does this weight creep back on after a year or two? It was a sprint to the finish line, but more often than not, they may have focused on hitting a certain number rather than creating long-lasting healthy habits.

Debt offers a similar story. Don’t just focus on the number; concentrate on the underlying habits and develop a framework that will support a debt-free future.

Prevent future debt by saving for non-monthly expenses

Think about some of the things that got you into debt: that $700 car repair, that plumbing leak in the laundry room, or maybe that spectacular gift last December.

This is normal spending. Of course, you want to make sure your car runs and that there aren’t any strange leaks in your home—and after all, isn’t giving better than receiving? This spending isn’t unusual. These expenses are a normal part of life; they’re really no different from paying for rent, groceries, or gas. However, they don’t happen on a schedule, so it’s easier to not factor them into your budget.

These expenses are going to happen, so it’s vital to prepare for them. Otherwise, you’re just going to inevitably fall further into debt.

Eliminate the debt cycle by saving for non-monthly expenses

You want to pay off debt fast, and here we are telling you to slow down. We’re not trying to kill your mojo—we promise. We just want this to be the last time you pay off your debt.

Often, folks will buckle down, live on rice and beans, and pay off all the debt, only to find themselves back in the hole six months later. With every penny going toward debt, you were unable to save. Now, when life happens, you have no other option but to borrow.

Learn to save. Learn to set money aside for car repairs, vet bills, everything—and you’ll never need to reach for that credit card again.

Here’s what the debt cycle looks like in a chart:

At the beginning of the month, you have plenty of money, but when it runs out, you begin running in the negative and must resort to borrowing. The cycle starts over when you get paid again. This is the Debt Cycle.

When you begin saving for your non-monthly, irregular expenses—we call them “True Expenses” around here—you form a cushion to catch you from going into the negative.

Once you’re really rolling, you can build in an even greater amount of financial cushion by living on last month’s money. And once you’ve arrived there, stumbling into debt becomes much more rare.

The myth of aggressive debt paydown

You may have heard the myth that says, “If you put everything possible toward debt, you’ll pay off your debt sooner.”

Consider these two stories of Jess and Brita. They each have $700 to allocate as part of their debt paydown plan, but they apply differently.

Brita goes all-in on debt payoff

Brita allocates the following $700 every month:

• Credit Card 1: $650
• Credit Card 2: $25
• Credit Card 3: $25

Brita attacks her debt with gusto. She goes all-in and plans to save for true expenses once she pays down her debt. The balance on Credit Card 1 quickly diminishes. For the first few months, it seems like this approach is really paying off.

In month three, Brita has a $750 car repair. Since she has nothing saved, she is forced to use her credit card to cover it, and her balance goes back up while her motivation takes a tumble.

Jess saves for true expenses first

Jess allocates $700 every month as follows:

• Emergency fund: $300
• Car repair: $50
• Christmas: $50
• Credit Card 1: $250
• Credit Card 2: $25
• Credit Card 3: $25

Each month her credit card balances decrease while the money she’s saving increases. After six months of following this plan, she was able to pay for a $750 car repair bill by using her debit card, without going further into debt.

After a year, Jess has paid off Credit Card 1’s entire balance and has made a dent into Credit Card 2’s, while Brita continues to struggle to pay off her first, now feeling dejected after a series of setbacks.

Keep your motivation going strong by saving first.

Some people in Brita’s scenario may become so discouraged by falling behind that they give up on their plan entirely.

Jess, on the other hand, has built the habit of saving. While it takes a little longer to see results, developing a strong habit has led to healthy progress. Even if Brita gets lucky and pays off her debt first, she still hasn’t learned how to save and remains at risk for future debt. Jess is in a much better position to break the cycle of debt once and for all.

Be like Jess—for your own sanity and security.

Is there such a thing as “good debt” and “bad debt?” It usually depends on who you ask. In this chapter, we consider both sides of the argument.

“But wait, aren’t some debts good?”

It depends. While borrowing allows you to get something more quickly, you now owe someone money and most likely had to pay interest on top of the purchase price.

Does the value increase or decrease?

When trying to decide if a debt is more helpful than harmful, consider the following rule of thumb: will your purchase typically increase or decrease in value?

Your house will likely increase in value. Borrowing for higher education will probably lead to higher income, so it’s also likely to increase in value. That bag of Doritos, however? Not so much.

This is why a mortgage debt is sometimes positioned as “good debt.” Virtually no one has that kind of money up front, and houses tend to increase in value. You could say borrowing money to pay for groceries is bad debt, since grocery items are essentially disposable and decrease in value. However, imagine a desperate situation where a family has suffered job loss, and incurring debt offers the only way to eat.

What about a car loan? While a car depreciates the second you drive it off the lot, making it to work is important, so a reliable car has significant value.

Since it’s not black or white, consider these guiding questions as you weigh borrowing money.

Good debt vs. bad debt: 5 guiding questions

Is the purchase absolutely necessary?

‍If it’s not a necessary expense, it’s better to save for it rather than borrow, reduce cash flow, and incur interest.

How will this impact my monthly cash flow?

‍If the loan payment will affect you for years and impede your ability to pay for monthly and non-monthly expenses, then borrowing isn’t a good idea.

Will your own the item for a long time?

If the loan payment will last longer than the item, borrowing does not offer a strong option.

Will the item increase in value?

Avoid borrowing money to pay for something that decreases in value. In this case, you lose money beyond the interest rate.

What is the amount being borrowed?

“Good debt” like mortgage debt or student loans often reach so high that borrowing becomes financially risky and therefore “bad debt.” Even if you want to buy a house, that doesn’t mean you should borrow the absolute maximum amount allowed. You have to weigh this debt against all your other financial responsibilities.

Debt can’t be that bad for you, right? Everyone does it!

Well, we think debt is lousy. We don’t say that from some moral high ground—plenty of us have carried debt before. No, it goes far beyond that. Debt steals from all of us in ways that may not be apparent on the surface level.

Debt steals more than money

Debt Takes Away Your Cash

When you have debt, those dollars are spoken for before you have a chance to decide where they should go. You don’t have control over these dollars.

Debt Kills Your Creativity

Debt allows us to live in a world where money seems infinite—there’s always more because you can charge and borrow.

This stifles creativity. Necessity is the mother of invention, after all. Who knows what super cool solution you would have found for bootstrapping a business, taking a cheap vacation, or decorating your office if you didn’t give yourself the opportunity to do it without debt. Anyone can borrow; it’s not a creative solution.

You are bursting with creativity—don’t let debt get in the way of that.

Debt Blocks Opportunity

Most people live beyond their means with the help of debt. When you live within your means, this creates a gap between your expenses and your income. That gap is opportunity.

When you’re borrowing money, you do not have that gap. You cannot responsibly jump at opportunities or take risks.

Maybe another job comes along that doesn’t pay as well upfront but offers some strong upsides on the back end. If you don’t have this opportunity gap, the new job isn’t even an option. Your current expenses don’t allow you to take that kind of risk.

Debt is a Losing Game

This last point has little to do with you and a lot to do with those profiting from debt. When you talk about getting credit card reward points, who is winning?

You might think you know how to play the game and know how to win. Yet, the banks created the game. You’re playing against someone that has made all the rules. More power to them, but I say, let’s take a little bit of the power back. Don’t play the debt game.

Learn more about why YNAB's founder, Jesse, doesn't like debt.

Debt consolidation: you’re promised lower monthly payments and promises of saved money. Is it too good to be true?

The lure of debt consolidation

We totally get the temptation. Debt consolidation companies promise you the world: lower payments every month and a big chunk of money saved! If you’re feeling the weight of those debt payments, this can seem like an appealing option—we certainly wouldn’t fault you for that.

However, if it seems too good to be true, it probably is.

The trap: credit card companies are playing to win

Make no mistake about it: these companies play the game of making money—your money—and they play to win. Lenders wouldn’t make these offers if it wasn’t profitable for them.

Their overarching goal isn’t to help you. It’s to make money off your problem.

You may end up with a lower payment, but a longer term on the new debt consolidation loan may cost you more in the long run. You’ve got to do the math and read the fine print.

Beware of zero percent interest rates

One of the most common strategies for paying off debt is credit card hopping, or moving the balance of one card to another card with zero percent interest.

Vet these offers very carefully. Be skeptical. One mistake on your part—one late payment—and the penalties kick in. They are betting that you will:

Fail to Pay it Off on Time

‍This usually means that you need to pay all the back interest.

Make a Late Payment

‍This could cause you to lose the introductory fee and end up with one even higher than their normal rate, or again, pay all the back interest.

Here are four lessons learned from a zero-percent nightmare.

Here are some questions to ask before moving your debt to a zero-percent card:

• Are there fees for transferring the balance?
• Is the new lower rate you’re being promised on the balance you’re transferring? Or just new purchases?
• Are there any hidden fees?
• How long is the interest rate good for? Will it potentially expire before you can pay back the loan?
• Will I be charged for accumulated interest at the end of the promotional period?

Take control for yourself

The message debt consolidation companies want you to hear is “you need us to solve your problem.”

You don’t need them. It might be helpful, but we know you can do this yourself. You can call the credit card company or loan company and negotiate for lower rates. This is often very effective, and the feeling of empowerment from standing up to a credit card company is perhaps more important than the math alone.

No debt paydown strategy will work if you do not address your spending issues. Follow our debt paydown plan, and you can rest assured that you will cover your expenses, save money, and pay down your debts.

When it makes sense to consolidate

So now that our soapbox speech is out of the way, there may be times when consolidation can be effective. Before considering a debt consolidation deal, make sure:

• You are in control of your money. You’re able to pay for monthly expenses, save effectively, adjust if/when something goes wrong.
• You have one month of expenses saved. This puts you in a strong position for cash flow.
• Your debt is the last missing piece and you are just bursting at the seams to absolutely destroy your debt.

If those three conditions are met, you are a savvy financial consumer, and it may be worth considering debt consolidation. Ask yourself these questions. Your responses can guide your decision as to if you think debt consolidation is for you or not.

• Will consolidating my debt result in a lower overall interest paid?
• How long will it take to pay that debt off?
• Will the savings in interest offset any closing costs or fees that result from debt consolidation?
• Often debt consolidation takes unsecured debts like student loans and credit cards and turns them into secured debt by holding an asset like a home or a car as collateral. If this is the case, are you comfortable putting those assets at risk in order to receive the benefits of consolidation?

Now it’s your turn. You’ve got your debt plan and now know the secrets on how to get out of debt and stay out for good.

It’s time to put your plan into action.

Make a plan for saving your non-monthly expenses with YNAB. It’s free for 34 days and will provide a big-picture perspective of your financial situation, help you set spending and saving targets, and empower you to pay debt down faster with the integrated Loan Planner tool.

Can’t get enough information about demolishing debt? You’ve come to the right place, friend. We’ve got everything you need to know about how to get out of debt—for good, this time:

• Are You Riding the Credit Card Float
• 4 Lessons from My Zero-Percent Nightmare
• Should I Pay Off My Credit Cards or Max Out My 401K?
• How to Improve Your Credit Score
• How to Pay Off Debt Fast: 12 Ideas
• Should I Consolidate My Debt?
• 5 Best Apps to Help Pay off Debt
• I Hate Debt, But the Reasons Why Might Surprise You
• Is All Debt Bad Debt?
• How a T-Shirt Can Help You Pay Off Debt Faster
• How to Snowball Your Debt & Reclaim Your Paycheck
• How to Get Out of Debt video course
• Debt Stories Podcast

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