Crush Your Debt in 2023: 9 Proven Strategies for Financial Freedom

So, you have a lot of debt and feel overwhelmed? You want to get out of it but don’t know how?

Look no more, here you will get 9 strategies, you can use now to get out of debt faster than you thought! But beware there is never a magic pill that wishes your troubles away, you need to do the work!

The average American had 96.371 USD in debt in 2021 (according to Experian) which includes mortgages, credit cards balances, auto loans, personal loans and student loans.

Debt and its effects

Debt has several negative effects on our lives:

- Credit Score: The more debt we have the more negative it will affect our credit score. Lower credit scores in turn will make it harder for you to say get a loan. Often to get a mortgage you need a debt-to-income ratio of max 40%. The US median debt to income is way above that.

- Interest Rate Paid: The more debt outstanding you have the higher the interest rate banks will charge you for additional debt.

- Job Applications: Some jobs require a credit check, and a large debt balance might make the employer reject your application.

Importance of an Emergency Fund

Before we start talking about getting rid of your debt, first we have to make sure we have an emergency fund. Because when we are paying our debt, the last thing we want is the need for a large emergency spending (an example can be large unexpected home repairs or having to buy a new car). So go right now and create this emergency fund if you don’t have it already. If you had it already, great, let’s get started!

Strategies to get out of debt

We will divide this part in two, as there are ways to technically manage your debt (paying off different types of loans) and there are ways to manage your debt indirectly (lower spending etc). So first let’s start how to technically manage your loans:

1) Debt snowball method: Here you are trying to pay back the loan that has the smallest balance first. Put all your debt types next to each and pay the minimum payment on all of them except the loan with the smallest amount of debt. Try to pay off the smallest debt first. This gives you a feeling of accomplishment. When finished, move on to the next smallest debt. It creates momentum and keeps you motivated to pay off debt. It’s not the most cost effective, but according to research by Harvard Business Review it was the most effective to help get people out of debt. The main reason behind this is that it psychologically easier.

2) Debt avalanche method: If you don’t need the extra momentum and motivation of the debt snowball method then the smartest thing to do is to pay off the most expensive loans first. Again, list the loans you have. Let’s say a car loan of 20000 at 7%, a student loan of 50000 at 4% and a personal loan of 30000 at 10%. Start with the personal loan because that will eat away the most money because of the high interest rate. The debt avalanche pays back your loans much faster, but it’s emotionally harder to do, because the high interest rate debt might not be paid off very fast, so you must hang on for a bit longer.

3) Refinance and consolidate all debts. Often you can take out a new loan with a lower interest rate If you combine your outstanding loans. Doing this reduces the number of loans and interest rate payments you worry about. It gives you clarity, direction and prevents you from missing a debt payment.

The second type of solutions is more indirect and more related to your budget.

1) Pay more than the minimum payment if you can: this will save you money on interest and debt will be paid back faster. Make sure you pay this amount back before the debt cycle is finished so it will positively affect your credit score.

2) Use windfalls to pay off debt: Imagine you have a tax refund, work bonus or inheritance or some other windfall. Use it immediately to pay off your debt, either in full or 50-50. This will speed up your debt repayment significantly.

3) Reevaluate your budget on the income side: maybe you have to think about how much cash you bring in each month. Some side hustle or part time jobs can be a good idea to bring in that extra cash to get out of the slur of your debt. It requires some extra work, but this might just give you the extra breathing room you need.

4) Reevaluate your budget on the expense side: while getting extra income might be a good idea, it might also be time to look at your expenses, there surely are some items you can cut back on a bit? If your debt is much higher than your income, you need to cut back seriously and maybe start thinking of going for coupon or bargain hunting. Check my other videos for tips on how to cut back on spending.

5) Get control over your credit card: If you feel you don’t have control of your credit card and are spending over your limit every time, try the following. Put physical cash that you plan to spend in a wallet. Whenever you are going to spend money, take it out of the wallet, don’t use your credit card. Seeing the money physically go will be a big motivator to keep going. Try it, you spend less when you see the money go out of your pocket.

6) Pay more than once: This is related to the previous topic. When you see you have some extra cash in your account, even very small, don’t let it sit there, you will probably spend it. Pay off your debt, even if it’s an extra 20 or 50 USD.

Other Considerations

When you think of it, why do we want to get out of debt? We saw earlier that having too much debt hurts your finances. But what are the underlying reasons that make you really want to get out of debt?

- Financial freedom: when you’re not in debt, you have control of your financial future, you decide where you are going, instead of your bank. Instead of thinking of debt you will be able to think about investments and retirement.

- Enjoy life more: with no debt, you will have more extras to have fun and new experiences. You can enjoy life more. Even if you do not have new experiences, the fact that you don’t need to think about your debt all the time makes you enjoy life more.

- Finally, debt has significant mental health and physical health effects. A study done by Add Health Study shows that household debt is a significant independent predictor of health outcomes. With no debt in the bank you will feel much better!

So while you probably have at least one of these advantages of getting out of debt, write them down and put them somewhere you can see them. Remembering why you are doing this helps you being motivated and makes you stick to your program.

Don’t forget, in the end, it all depends on your personal situation. If you have let’s say an income of 50.000 USD per year but a debt of 100.000 USD you will need drastic measures for the coming years. But if you have debt of 50.000 USD and an income of 100.000 USD, then you can get out of debt with only a few changes that won’t affect your life drastically.

There is no free lunch and you have to put in the work!

Feel free to click the link below where we break it down for you in our YouTube video:

https://www.youtube.com/watch?v=VwgF6LJwkoM