Take Control of Your Finances: 5 Steps to Get Out of Debt

One of the most common financial questions is how to get out of debt. Digging out of debt can be painful—but the payoff is empowering. Just think: All that money spent paying interest on past purchases could be money invested for your future. But it takes a committed and consistent plan to get out of debt and stay out.

“Paying off debt doesn’t need to be complicated,” says Fidelity vice president Ann Dowd, CFP®. “Like so much else in life, it just takes focus. Why not make this year the year that you right-size your debt burden?”

Here are five steps to make this the year you take control of your finances and get out of unhealthy debt for good.

1. Look for Lower Interest Rates

It’s difficult to dig out of debt when interest keeps piling up. To make sure that more of your payments go to paying down the principal, shop around for low-interest balance transfer offers or loans. You may even qualify for 0% interest promotional rates. There’s typically a fee to transfer a balance: for example, 3% of the balance transferred. Paying the fee and getting a lower interest rate can sometimes be worth it if paying down the entire balance is going to take time. Do the math to find out if you’ll save money by transferring a balance—or use an online balance transfer calculator. There are plenty of tools out there to do the math for you.

For example, let’s say you have a credit card balance of $5,000 with an interest rate of 20%. If you transfer that balance to a card with a 0% promotional rate for 12 months and a 3% transfer fee, you’ll pay $150 in fees but save on interest. If you can pay off the balance within the promotional period, you’ll come out ahead.

2. Pay More Than the Minimum on Credit Cards

Making the minimum payment on credit cards can leave you in debt for years. By paying just the minimum, a credit card balance of $1,000 at a 20% interest rate with a minimum required payment of $35 would take 42 months to pay off. Your total payments would equal about $1,482, which means you’d pay $482—nearly half of your balance—to borrow money for 3½ years.

Bumping the payment up to $50 per month would pay off the balance in 23 months and cost $121 in interest. Paying $100 a month would pay off the debt in 11 months and cost $59 in interest.

Adding a little bit more to your monthly payment can help you pay off the debt in a fraction of the time. But here’s the perennial problem—where can you find this extra money? Let’s face it: Stumbling onto a pile of cash doesn’t happen very often. Common sources of extra money include:

• • Reduced spending

• • Pay raise

• • Bonus

• • Tax refund

Finding spots in your monthly spending where you could cut back is the most likely source of extra money. The best way to find them is by examining your spending. Look at your spending history through your bank or cash management account, or track your spending for a period of time. You can also use tools like Fidelity’s Spending and Budgeting tool to help. After you see where your money goes, look for areas where you may be able to pare back expenses to free up more money to put toward debt—even just a little bit will help.

For example, you may be paying for streaming services you rarely use, or maybe you don’t come close to your cell phone data limit. Maybe you dine out more than in, or order takeout more often than you cook. You don’t have to give up all of your luxuries, but nearly everyone has areas where they splurge more than necessary.

3. Have Money Available for Emergencies and Unplanned Expenses

Getting out of debt while having nothing saved for the inevitable emergency may leave you running in place. You do all the work to pay down debt, and before you know it, the hot water heater springs a leak, or your car suddenly needs an expensive repair. Without an easily accessible stash of cash, credit cards may be the only option.

Think of your emergency savings as a bill. With rent or mortgage payments, contributing to a retirement fund, and myriad living expenses, you already have a lot to balance. But if you turn saving for an emergency into a monthly priority, you’ll get in the habit of contributing to it regularly. Fidelity suggests starting by saving $1,000, and continuing to save until you’ve accumulated between 3 and 6 months’ worth of essential expenses.

Work to keep your essential expenses under 50% of your take-home pay, and be sure to save for the future too—contribute at least enough money to your workplace retirement account to get the entire match from your employer.

Money that’s left over after you’ve met all your necessary obligations, built up your emergency savings, and obtained your entire employer match can be funneled into debt repayment, if you still have any left, or used to boost your retirement savings. Once you are out of debt, aim to ramp up your retirement saving to 15% of your annual income before taxes—including any employer match.

4. Make It Harder to Spend

It’s nearly impossible to get out of debt if new purchases keep adding to the balance. Consider hiding your credit cards so you can’t keep charging—or just leave them at home when you go out. That can be a little bit easier said than done when shopping online. Some online retailers offer the option of saving your payment information. Decline the option if you have the chance—making it a little more difficult to spend money is often all it takes to skip unnecessary purchases.

Knowing how much debt you have and how much it costs may help you stop charging. Make a list of your debts, the total amount owed on each, the monthly payment, and the interest rate each lender is charging you to borrow.

There are two common strategies to tackle credit card debt: the snowball method and the avalanche method.

Snowball Method

In the snowball method, you start by paying extra on the credit card with the smallest balance until it’s paid off. Then move on to the card with the next smallest balance, paying the minimum payment plus the amount you were paying on the first card. Continue this until all your cards are paid off. The benefit to this method is that it helps build momentum, and it’s satisfying to see zero balances.

Avalanche Method

In the avalanche method, you start by paying extra on the card with the highest interest rate until it’s paid off. Then move on to the card with the next highest interest rate, making the minimum payment plus the amount you were paying on the first card, and continuing this approach until all your cards are paid off. The benefit to this method is that you may save money on interest, especially if your cards have a wide range of interest rates. Once your cards are paid off, if you continue to use them, make sure to start paying your balance in full every month.

5. Learn to Use Credit Wisely

Following a few basic rules for credit can help you learn to use it wisely. Avoid charging more than you can pay off in one month and always make your payments on time. If you do find yourself with a balance that follows you from month to month, make it a priority to pay it off so that you can use your money to achieve your financial goals—especially your retirement savings goals.

Now, Ramp Up Your Savings

After you’ve paid off debts, try to avoid slipping back into the spending habits that may have led to the problems in the first place. Keep cultivating good habits by saving for the future. Make sure your emergency savings is fully stocked. Take the time to get your retirement savings on track. Now that you’re not paying credit card companies every month, you may have some extra money to set aside for the long term.

Conclusion

Getting out of debt requires a committed and consistent plan. By following these five steps—looking for lower interest rates, paying more than the minimum on credit cards, having money available for emergencies, making it harder to spend, and learning to use credit wisely—you can take control of your finances and achieve your financial goals. Remember, it’s not about stumbling onto a pile of cash; it’s about making small, consistent changes to your spending and saving habits. With focus and determination, you can get out of debt and stay out for good.