7 Ways to Get Out of Debt in 2020

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ave you made your New Years' resolution for 2020?  According to a survey conducted by YouGov.com, 37% of Americans have made resolutions in the past.  Only 1 in 5 stuck to their resolutions throughout the year. 

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debt & credit

debt & credit

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Many leaders are calling the new year a "perfect year" playing on the 2020  humor by many Optometrists on the optimism of a 20/20 vision.


If your household struggles with debt, let's make 2020 the year you achieve debt freedom.  Why should you pay off your debt this year?


Because the American Banking Association claims there were 364 million open credit card accounts in the United States as of the end of 2017.  


While we don't know the reasons why such accounts were opened, it is safe to assume that American consumers are relying more on credit than their actual earnings and income. It's not a trend we need to continue.


In this article, you will discover 7 ways to pay off your debt and start your family on a path towards financial freedom.  


  1. Choose a Debt Payment Strategy

  2. Pay Off Your Credit Cards

  3. Reduce Your Household Expenses

  4. Increase Your Income

  5. Spend Less Money Every Month

  6. Reduce Your Interest Rates

  7. Start Using Debit or Cash to Pay for Things

1.  Choose a Debt Payment Strategy


Often confused as being the same, debt stacking and debt snowball are different strategies designed to pay off the debt in its unique method.   


What's the Difference between Debt Stacking and Debt Snowball?

In the simplest explanation, the difference between debt stacking and debt snowball is knowing which debt to pay off first in sequence order. 


Debt stacking requires you list all of your household debt and organize it from highest to lowest interest rate. Applying the payment structure from the highest interest rate to the lowest interest rate is the fastest debt payment method, mathematically. 


For example, let's use three debts, which include the following interest rates: 22%, 15%, 4%. To rid any skepticism, we are going to assume each obligation requires a minimum payment of $200 per month.​


By focusing on the debt with the highest interest rate by making payments more than the minimum amount, you drastically reduce the balance of the obligation at a faster rate. When utilizing this method, ensure you are making consistent payments to the other debts based on its required monthly minimum amount.  


The 22% rate every month is 1.833% charge. Therefore, $3,400 x 1.833% = $62.32 added each month compared to a monthly charge of $27.94 (15%/12= 1.25% per month x $2,235). 


Making additional payments on the $62.32 versus the $27.94 per month is common sense and is the fast method to watch your debt shrink.

Debt snowball organizes your debt from the lowest balance to the highest balance, not by interest rates. For example, using the balances of the three debts in the illustration above, we arrange the obligations by focusing on paying off the lowest balance first with additional payments that exceed the minimum balance while making the required minimum debt payments on the remaining debt. 


Once the first debt is paid off, you must apply the same amount towards the monthly payment from the first debt.  This amount is added to the second-lowest debt.  


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Credit: Unsplash

Which is Best: Debt Stacking or Debt Snowball?

You've already learned that mathematically, debt stacking is the fastest method in paying off debt. So you might be asking, "Why doesn't everyone use this method then?" It boils down to human behavior. 

There is a strong correlation in the human brain that associates positivity, optimism, and motivation when seeing progress made towards achieving a goal. According to Psychology Today, "While an optimistic outlook provides us with a rosy outlook, it also turns our minds towards the future." Your optimistic future is paying off that debt!

With the debt snowball, you physically see your debt balances drop, and once that debt is paid off, those same payments of the debt are reapplied to the second-lowest balance. It frees up cash flow helping your debts drop fast. 

Try our customized Debt Stacking Worksheet, and you can choose which method to utilize in your financial situation.

Should I Pay Off the Smallest Debt First?

Are you struggling to make your minimum payments every month, or do you have extra cash to spare? If cash flow isn't an issue, then focus on paying off debt with the highest interest rate.


If you are struggling to make progress in paying down your debt balances and have very little extra cash each month, then apply the Debt Snowball Method by focusing on paying down the debt with the lowest balance first while making minimum payments on the rest of the debt. 

Once you pay off this debt, use that same payment from the first debt, and apply it with the minimum monthly payment. Continue this process until you paid off every debt.

Credit: Shutterstock

2. Pay Off Your Credit Cards


Did you know the average American consumer has 2.6 (let's say 3) credit cards? This is according to a Gallup study; however, does this reflect if Americans are handling credit card charges responsibly? Not necessarily. Anyone can have multiple cards and never use them. 

Something that should alarm you is the latest report produced by CardData.com, where they have studied the Top 100 US Credit Cards companies and found rising credit card losses and charge-offs at levels not seen since early 2013. 


For example, Chase saw a 10.9% increase in credit card losses while Bank experienced a 4.3% loss. We are now witnessing a seven-year high in credit card delinquencies, and now is the time to get your cards paid off.

In this article, you will discover five steps in paying off credit cards that amount from $10,000 to $15,000.

A.  Ask Yourself, "Why Are You Using Credit Cards?"


Depending on which study you review, the average credit card interest rate was 17.21% last December 2018. It increased to 19.21% in 2019, with the average U.S. household has $16,000 in credit card debt.


But why are you using your credit cards in the first place? In many cases, you are just trying to get by. Perhaps, you need money for gas to hold you over until payday. Another reason is your grocery bill was higher this week compared to last week. It is everyday common issues that make it tempting to use those plastic cards. 


While some claim that credit card spending is an addiction, the first step is to recognize its a problem. I tend to take it a step further to understand why it's a problem in the first. Below are additional steps to kick away your credit spending habits.


Let's be honest, who uses cash anymore? Most consumers have traded paper currency using plastic (debit or credit) as a way of convenience.


It is faster, easier, and gives you a sense of safety instead of walking around with money. Also, many companies offer rewards and points as a way to entice new customers.  


This isn't to claim that cards with points and rewards are bad. In fact, many cards have added benefits, but the issue lies in the lack of money management.


If you aren't keeping your monthly bills paid on time with a plan in place to pay those off, then it is easy to fall behind and difficult to catch up later. 


Odds are, you pay the amount on your credit statement and not according to your debt-freedom plan. For instance, if your card company requests a minimum payment of $55 for the month, but you normally pay $65, it reassures your brain you are going above-and-beyond and keeping your monthly bills paid.  


In reality, without a plan, you may be overlooking the damage of those interest rates. Sometimes, you need to pay an additional $100 because that is what your debt-freedom payment states. Do not deviate from your plan.  

Eventually, you are engulfed and can't keep up, which means you are more reliant on credit than before. I recommend paying off those high interest credit cards by getting a consumer loan.  Try a service lender such as Prosper which you can get a lower interest rate and affordable payments.

This also means you can no longer use those credit cards until all of your debt is paid off.


If you are looking for the fastest method to pay off your debt, then download the app, Debt Payoff Planner.


I've personally used it, and it's free. While you can pay for an affordable membership, the free platform meets the intent.

B. Know How Much You Owe


This is obvious, but you may be surprised to learn most households do not know precisely how much they owe. They have a ballpark figure in their heads, but since they have no debt payment plan, there was never any reason to know the exact debt figures.


In the first step, we mentioned understanding how and why you're in debt. Now that you understand why you are getting buried in debt payments, it is time to dust off your notebook and grab a pen. Using ink and paper, jot down every debt you owe. From medical bills to student loans, list those out in a column so you can visually see the debts. 


When writing with something onto paper, it is likely to trigger your brain cells, helping to enforce a desperate need of action. After listing all of your debts, you are going to list them again but from the lowest interest rates to the largest. Beside each debt and interest rate, write down the total balance.


In a recent Forbes article, "You have a high rate 20% interest credit card, with $10,000 balance and you make the minimum payment each month (this can vary but let's say it's $200). Of your yearly payment of $2400, $1900 is going to interest! Only $500 each year is actually paying the debt. At this rate, it will take you over 9 years to pay it off."


It's time to get serious!

C. Get a Plan to Pay Off Your Debt


Increasing your salary is very unlikely. This means you need to get a plan to start taking action. Start by reviewing your expenses and researching where you can cut back.  


Next, you will need to fine-tune your monthly budget, ensuring every dollar has a home. This means any leftover income after paying your rent, groceries, bills, etc., any extra money needs to be designated to savings, debt payments, emergency funds, somewhere in your budget so it can be labeled. It's time to get responsible with your money.  


After getting a budget in place, organize your credit cards from the highest interest rate to the lowest rate. You have two options here. You can either use the mathematical approach which will pay off your debt the fastest or if you are like most American households living paycheck-to-paycheck, organize your debt from smallest balance to largest balance.  


When organizing your debt balances from highest interest to lowest, use the Debt Payoff Planner app as it will tell you exactly when your debt will be paid off to include how much to pay on each debt. It takes away all the guesswork.


The other method, lowest balance to highest balance, only works if you are struggling to make ends meet. What this method allows you to do is make larger payments on the smallest debt while making minimum payments on the remaining debts.  


After that debt with the smallest balance is paid off, you repeat the process with the next lowest balance to include that prior payment amount. 

D. Refuse to Use


The toughest part of kicking away your credit card habit is to stop using it altogether. While some claim it is an addiction, it is very much convenience and lack of money management. 


After your credit cards are paid off, you must continue using a budget plan every month, assigning every dollar to a category. Since your debts are now paid off, you have more financial flexibility, which means you can start creating new categories such as $200 for weekend entertainment, $300 for clothing, and more. This restricts your appetite from overspending in your budget while reigning in unnecessary expenses. 


Achieving financial freedom is the greatest gift you can receive because it gives you the financial flexibility to travel more, enjoy life's blessing, reduces stress, and you may find you need to work less, etc.


Reflect on these goals or your own goals regularly to stay motivated. During the difficult times when money is tight, and you are tempted to use your credit cards, remind yourself of how painful it was to be in debt!

While I am not recommending your cancel your cards because this may temporarily harm your credit score, I do recommend cutting all your retail cards and keeping no more than two credit cards with $0 balances. If you have more than a few credit cards, then cut these up. The extra cards will cause additional distractions and temptations.

E. Transfer or Refinance


There are times when shopping around for lower interest rates makes sense. If you have $11,000 in credit cards with a 14% interest rate, you can save a lot of money by transferring to a credit card offering an introductory period of 0% for six months.  


The biggest challenge after transferring is to continue with your debt payment plan. Having a 0% interest rate will drastically speed up your payment process.


If you have a mortgage, consider refinancing as mortgage rates continue to decrease. Even 0.25% can save you thousands over several years. 


It is important to note that the cost savings of a refinance must exceed that of your closing costs. According to theMortgageReports.com, "Expect to pay anywhere from 2 to 5 percent of your loan amount in closing costs when you refi. Say you need to borrow $150,000. If the closing costs equate to 2 percent of the loan amount, that adds up to $3,000. In this example, the amount you save via a lower rate over your new loan's term should be greater than $3,000." 


For example, if you have a current loan balance for $175,000 at 3.65%, paying $1,350 per month, a refinance at 3.35% for 30 years with the added $3,000 in closing costs will shrink your monthly payment to $784.47. See the figure below.


If you find yourself struggling from making simple credit card purchases, you will have to make it a habit to retrain your brain. Using muscle memory, stick your credit cards into the water, and freeze those cards. It creates a large hurdle and challenge from using it. 


Try cutting up your credit cards. While you can keep those cards active to help your credit score, cutting the cards up will eliminate the temptation from using them.  


Debtors Anonymous

Finally, if you continue to struggle with debt, I highly recommend you contact Debtors Anonymous, which offers face-to-face, phone, internet meetings, and other services to help you. 

They offer face-to-face counseling, group meetings, or you can contact them by phone.

Credit: Wix Photo Gallery

3. Reduce Your Household Expenses


Start with Utilities


A. Shift your heavy voltage items to an earlier time of the day or later in the evening.  


For example, wash and dry your clothes early in the morning or late in the evening, usually after 7 pm or 8 pm in most cities to avoid the peak capacity charge fee. After 7-8 pm (depending on your local municipality) is typically after a city's peak hours, which is a time of the day when most consumers are using energy. You can have savings immediately from $2-$10 per month, but first, research your utility company to confirm their Peak Capacity Hours.


Also, consider swapping your dryer duct with a new tube as ducts typically get clogged with dryer lint. Here is one for less than $10 to order from Amazon.


B. Set a time to adjust your thermostat.  


You may not like this, and I'm with you on it. Still, we need to adjust our thermostat when not at home — adjusting it a few temperatures higher in the summer/colder in the winter when you will be at work or away from houses such as during a vacation or a period when you're gone for more than a few hours.


One of my cheapest investments in accomplishing this was purchasing a Honeywell Smart Thermostat, but a similar one is the Nest Learning Thermostat

It works well with Alexa and your wifi, so you have absolute control of your thermostat needs.


There were moments on vacation when severe storms rolled through, and I could adjust the thermostat based on the temperature outside. Coming home from vacation, if we were an hour from the house, I would set the thermostat, so the house was cold by the time we arrived. 


No longer do you need to lock it up with a plastic casing and keylock. The Nest Learning Thermostat is such a favorite product because it recognizes your room's temperature habits and starts saving you money automatically. Check it out here for more in-depth information. 


C. Change out your light bulbs for LED 


Saving the best for last, or at least my favorite is changing the traditional light bulbs to LED. 


When LED bulbs were initially launched, the quality wasn't that great. Today, you can barely tell the difference in quality other than seeing the savings in your electricity bill. 


The brand I found worth every penny and caused me to change every bulb in my house to this brand is the Cree Dimmable LED bulb. These are the Wink and  Alexa compatible, which means you can set the timers for each day of the week and how much energy it burns. 


Also, I noticed the savings in my power bill within two months. That was reason enough for me to purchase more. With the wink app, I controlled the lighting percentage, so in the early evening hours, I made the porch brighter, but after bedtime, I would have the lights timed to burn at 35%. It is a fantastic technology, and only the Cree Dimmable LED bulbs met my expectations and were the best way to save money. 

Credit: Freestocks.org

Reduce Your Entertainment/Cable Expenses


In the article, Your Guide to Cable Alternatives, we break down the costs and benefits of each online streaming service so you can be a well-informed consumer and smart shopper.

Get a New Affordable Life Insurance Policy


Did you know there are two types of life insurance? 


Let's discover and explore the two types. The two most common types are Term and Whole (Permanent) Life Insurance.


I have extreme feelings about whole life, which I get into more depth on DollarOtter.com, but know that term is as it states “Term” because it is for a particular period of time, such as 10-year, 20-year, etc.


Premiums are typically cheaper for term than whole life. This is because of whole life charges for two things: life insurance and cash value. Because it has two pots of funds, it is more costly, but you are covered until one’s death, typically.


Read our in-depth article on the differences between term life and whole life insurance.  

4. Increase Your Income


There are several ways to go about doing this.  The first is obvious and seek out a raise from your current employer.  Before you must schedule a time to discuss with your supervisor about receiving more income, be sure to do your homework first.


In an older Forbes article, but still very relevant, check out "14 Tips For Getting a Raise When They're Not Handing Them Out" 


The other way or ways is by seeking additional income.  We dedicated a special blog article highlighting 15 Ways to Earn Extra Income and How to Make Money Online.

Credit: Adobe Stock

5. Spend Less Money Every Month


Sound simple? You might be surprised to learn how difficult this can be. I use a spending analysis tool by Personal Capital, informing me if my spending is higher or lower than the previous month.  


Such alerts can be great to force me to dive into my budget and see where I may have gone off-course. 


Every household that has achieved or will achieve financial freedom must have a sound financial plan. It is the roadmap to your success and your home. 


It is also a great example to set for your children that money isn't infinite and must be managed appropriately. 


Having to follow a well-planned budget will help to hold your spending and finances accountable. While it isn't always fun, I promise you will love the extra money that is being saved, and you might even see an improvement in your credit score.


Below are the steps to getting a solid household budget in place because paying off your debt in a consistent process must be planned accordingly.



A. Start with Income


Some financial planners like to start with calculating your expenses, but when building a plan for your budget, you must begin with a positive net number. This number is your income because you have to start somewhere. 


For example, think of your budget if building a home. While you can start picking all high-end fixtures, appliances, and furniture for your new home, you have to know where to start (your top-line figure). If your budget is $200K, the options and developer may be very different than if your budget is $1.5M.


Therefore, start with your net income and look at your paycheck deposits, stubs, or checks and write down (or put in a spreadsheet) how much you make monthly. 


Your budget plan isn't finished yet. Next, you need to calculate any additional income you might be receiving. Are you getting cashback rewards regularly from your bank or credit cards? Are you earning dividend income from your investments? How about side jobs or allowance?


This will be added to your net income. See below for an example. Now that we have a definite number of working from let's move on to expenses (Yuck!)


B. Track Your Expenses


Tracking your expenses will be the most tedious and time-consuming part of building your budget. You will find that going through recent bills, paper, and online statements isn't a quick feat. But YOU MUST DO IT!


There is nothing worse than getting into Day 10 of your budget tracker only to find a $30 deduction hitting your bank account because you didn't take a few extra minutes to pay attention (Brutal but Honest Truth!). It throws everything off. If this does happen, brush yourself off, grab a cup of tea or coffee, take a deep breath, and adjust your budget for the next month.


Write down every single expense for this month. At this point, don't worry about the order or organization of your bills. You are working on a rough draft for your budget, and attention to detail is of fundamental importance at this stage.


Next, you must double-check your work. A great way to ensure you haven't missed overlooking any expenses is by looking at previous transactions that may require you to dust off those bank and credit statements to review any potential bills that may post this month. 


Once you feel confident that every bill and debt are listed out, start organizing it. Organizing your bills can be done in several ways. I've seen budget list debt by categories such as Housing, Insurance, Investments, Debt, etc. Another way to organize your expenses is by the due date. Pick a method that works for you.


Finally, once all of your debt is listed out and organized, determine how to reflect your dollar amount. What this means is do you write down the exact dollar amount or round to the nearest dollar. 


As a fan of several trendy financial planners, I don't follow the rule of budgeting every dollar. While this rule does work, I find great joy in having some extra cash left over at the end of the month. I use this "extra" leftover amount as a reward to do what I want with it. It entices me to save over the month.


Either way is excellent, but stay consistent with it and recognize that bills do fluctuate based on interest rates, taxes, fees, usage, etc.


C. Pay Yourself


You might be thinking, "I can't afford to pay myself!". You must! While three-fourths of American households have little to no savings, you must get into the habit of saving money (and not touching it!).


By paying yourself first, you may be forced to cut some expenses. If this proves too painful, think of the long-term impacts of building a net worth or pile savings can mean. Also, this may be a great way to start building that emergency fund finally. 


A typical savings goal is to set aside 10-20% of your net income. If you genuinely can't afford to do this yet, start smaller with plans and a goal to increase it later (but not 10-20 years later). 


D. Cut Expenses


Now that you've identified all of your expenses and your monthly savings target, it is time to slash costs. This may prove to be more complicated than you think because some bills have emotional ties. 


For example, as a hobby, I take photographs because I love traveling and nature. Most photographers use Adobe Photoshop to adjust coloring and lighting in photos. When I first started, I was subscribing to Adobe's service for $59 a month. I was getting a lot of value from it, but it just got to be too expensive during the months I wasn't able to photograph. 


I had to cut the emotional tie, and something incredible happened when I did. Because Adobe didn't want to lose a customer, I got a drastic reduction of $19.99 per month. Sold! By taking action to cut ties, I earned a considerable discount.


Remember cable TV? What was once a typical $100 monthly expense, now many homes have cut their cable ties to pay for online streaming. Determine where you can slash some costs in your budget.


Taking an honest effort to reduce expenses can afford new opportunities to renegotiate bills. When was the last time you priced your auto insurance or life insurance? Technology is making services more affordable, and if you haven't received a new quote in over 12 months, it is time to discover savings.


F. Track Your Progress


Tracking your progression has several benefits. The first benefit is you can visually see positive steps being taken in holding your money accountable. Every dollar is being told how to work, and it identifies if gaps exist in your budget.


Next, it creates an opportunity to adjust your budget. Let's be honest. Not every expense is consistent every single month. Your budget may require some adjustments and tweaks. Perhaps you couldn't save enough, or maybe you can save more than you initially thought. Tracking the progression of your budget helps you to take those actions.


While we won't get into the topic of debt payments, it is essential to set realistic goals and targets of paying off your debt to include ensuring you are paying off your bills. 


When I build a new month's budget, I put a checkmark box beside each expense. As the days progress, I monitor my bank account to see which bill was paid. Once it posts in my bank account, I place a checkmark beside that debt. 


Having a similar process in place will help you monitor closely and determine if a payment was missed. 


G. Final Thoughts


Having a sound budget in place keeps your money accountable. By telling your dollars where to spend, save, and pay down debts, you will achieve financial freedom faster than without a plan. I promise.  


Start taking action immediately to help meet your financial goals and plans. Let me know if you have any questions, and be sure to check my Instagram page @dollarotter_blog.

Credit: Unsplash

6. Reduce Your Interest Rates


Earlier, you read out organizing your debts from the highest interest rates to the lowest interest rates.  If you've seen positive progress in your debt management and balances are getting smaller while seeing improvements in your credit score, it is worthwhile to make a five to a ten-minute phone call and ask for a rate reduction.  


Before you do, check out the tips by US News, 4 Steps to Lower Your Credit Card Interest Rate 


Recommended Article:

8 Ways to Reduce Your Medical Bills 

7. Start Using Debit or Cash to Pay for Things


If you find yourself having trouble paying off your credit cards at the end of every month, consider paying only with cash or your debit card.  


Using credit cards is convenient, but it removes any emotion from purchasing items or paying bills with cash.  The psychology of using credit instead of cash is one reason why so many consumers get caught in a debt spiral.  


When faced with paying the minimum payment or having to fork out the full amount every month, your natural tendency is to pay the least amount possible. 


Also, credit can act as an enabler.  If you know you have a spending habit or cannot stick to a grocery list because you get caught up in the sales or local deals, using credit will only entice your spending appetite.  


Therefore, avoid using credit and use cash, because it forces you to stick to your budget and credit will not be available to bail you out.


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