Living Debt Free: 7 Effective Ways To Help Pay Off Debt Faster

Summary: Debt can stack up quickly and spiral into financial distress. Payments of mortgages, student loans and outstanding credit card balances (among others) can rapidly run down your finances and send your credit score plummeting if you’re not careful. Here are some tips to help avoid the debt trap and embrace financial freedom.

In January 2024, the average credit card debt for Americans was $6,295. Poor financial choices are often the reason people end up in debt. However, you can go into debt even when you make all the right financial decisions if you have an unexpected illness, issue with your insurance coverage or encounter any other unforeseen emergency.

With average credit card interest rates hovering around 24.66%, it can be hard to get out of credit card debt, especially if you can only afford the minimum monthly payment. Your debts can snowball over time, straining your finances and adding undue stress to your life. That’s why it’s more important than ever to take concrete steps toward becoming debt free.

What does it mean to live ‘debt free’?

Living debt free means you have little to no debts weighing you down as you finance your lifestyle. You pay for everything with the money you have on hand, and if you don’t have the funds in your bank account to buy something, you don’t buy it.

There are many benefits to living debt free. You don’t have to worry about mounting interest payments on loans, you can look after your needs and those of your loved ones with less stress about your day-to-day finances. And, in some cases, living debt free also means you have more opportunities to save for the future.

Finally, there is something liberating about not owing anyone anything and having more control over where your paycheck is directed, such as an emergency fund.

How can I pay off debt faster?

If you find yourself overwhelmed by a mountain of debt and are struggling to get by, there are steps you can take to help pay off your debt and put yourself on the path to a debt-free life.

1. Create a budget

A personal budget can serve as a roadmap of how much income you bring in each month and where that money goes, such as your bills and expenses. There are many budgeting models that can help you rein in your spending.

A popular budgeting model is the 50/30/20 plan that is based on where you spend your income. Under this plan, you should be spending:

• 50% on needs (rent, utilities, groceries, etc.)
• 30% on wants (restaurants, entertainment, vacations, clothes and more)
• 20% on paying off debt or savings (this includes your mortgage and other loans)

Another option is zero-based budgeting, where every dollar you earn has a purpose. After paying all your bills, putting money away in savings or paying off debt, your account reaches zero.

2. Slash spending

After you’ve created a budget and figured out where your money is going each month, you can look at expenses you could trim. For instance, instead of spending $100 a week on ordering meals from restaurants, consider prepping home-cooked meals over the weekend that you can eat during the work week.

Any savings made this way is money you can allocate to paying off your debt. And, if you are using credit cards for those expenses, cutting back can also prevent you from adding to your debts.

Lowering your living expenses is also a helpful way to reduce debt. Evaluate what you spend on budget items like rent, your car insurance and even your streaming services. See if there are ways you can downsize your life while still enjoying recreational activities that are frugal or free.

3. Say no to credit cards

It may sound drastic, but one way to reduce your debt is to stop using credit cards altogether, unless you are unable to pay off the monthly balance comfortably.

Relying on credit cards to pay for things you can’t afford means a good portion of the minimum payments you make every month pays for the high interest on the main balance.

Think of it this way; you found discounted roundtrip tickets to Paris for just $400 and used a credit card to purchase the tickets. The credit card has an interest rate of 26%, so you’ll be charged about $8.93 just in monthly interest for those tickets, if you don’t pay the balance off right away.

It requires financial discipline, certainly, but not using your credit card to buy things you cannot afford is a critical step towards living debt free. Paying off your credit card in full each month will also help you improve your credit score.

4. Use the snowball and avalanche techniques

Many budgeting experts recommend using the “debt snowball method” to pay off multiple credit cards. With this method, you pay more than the minimum payment on your credit card with the lowest balance until you pay it off. Meanwhile, you make minimum payments on your other cards.

Once you’ve paid off the one card, you start making larger payments on the card with the next lowest balance until that is paid off as well. You continue this pattern until all your credit cards are paid off.

With the “debt avalanche method,” you start paying off your debts with the highest interest rate rather than the one with the lowest balance. This may feel like it takes longer to pay off your balance, but could help you save on interest. Either method can be effective in helping you pay off your debt.

5. Consider debt consolidation

If you have multiple credit cards with high-interest rates and high balances, you might want to consider getting a debt consolidation loan to help pay them off. While a debt consolidation loan is still a debt, it can help you get closer to debt free living because the interest rates are usually considerably lower than those for credit cards.

While the average interest on a credit card is about 25%, the interest on a debt consolidation loan can be much lower. The less you have to pay in interest, the more money goes to paying off the principal balance of your credit cards. It’s important to thoroughly research this option to determine if it’s right for you.

6. Apply for a balance transfer credit card

While applying for another credit card doesn’t sound like a smart idea when trying to minimize your debt, a balance transfer credit card that offers a 0% introductory rate for several months may help you pay down your existing credit card debt.

There are several credit cards that enable you to transfer the balance from an existing high-interest credit card to one that doesn’t charge interest for 12 to 21 months. This way, your payments go directly to paying off the card’s principal balance rather than the interest.

Transferring a balance usually involves a 3%-5% fee, so you should make sure this fee is less than the interest you would be paying on your existing card. Also, if you choose to use a balance transfer credit card, be sure you can pay the balance before the end of the promotional period, or else you will be saddled with hefty interest.

7. Get a side gig for extra income

If you have extra time after your regular job and your health allows it, consider getting a “side gig” to earn some extra income that you can use to help pay off your debt. A side gig can also indirectly help you save money because you’ll spend your spare time working and earning rather than spending money.

Conclusion: The journey to becoming debt free

Being in debt can take a toll on your health and impact your current and future economic security. However, there are many things you can do to pay off your debt and get on the path to financial freedom. Your trusted financial professionals at Mutual of Omaha can help you craft a budget and create a custom plan to help you pay off your debts.

FAQs: Common questions on becoming debt-free

Q1: Are there disadvantages to being debt-free?

Taking on debt is a commitment, but it’s a mistake to think that being debt free equals financial freedom. It’s more important to focus on being debt free for long periods of time. So, while a simple, manageable loan or two can benefit your credit history, ensure you don’t rely on debts to take care of basic necessities like your rent and groceries. Only take on debts that you can repay comfortably.

Q2: How do I pay off debt when I live paycheck to paycheck?

Perhaps the best way to pay off your debt if you live paycheck to paycheck is the debt avalanche method. With this method, you pay as much as you can on your debt with the highest interest rate, and minimum payments on your other debts. Once you pay that debt off, you move to the next debt with the highest balance or interest rate. If you are living paycheck to paycheck, you may want to increase your income and/or reduce discretionary spending to help direct more money toward paying off your debts.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.