Millennials are one of the most debt-burdened generations since America outlawed indentured servitude. They owe an average of $42,000 per person. Only about one in five millennials are actually debt free, while a whopping 11% of this generation owes more than $100,000.
The two biggest sources of debt are credit cards and student loans. While credit cards make up the most common form of debt, for most young people student loans are their largest single obligation. So much so that student debt can wipe out nearly three quarters of your net worth if you're a millennial.
How to Get Out of Debt
So with all of that said, it's worth trying to figure out how to start getting rid of all that debt. The good news is, there are a few options.
1. Get a Raise
Let's address the obvious issue first. Many guides on how to get out of debt involve some version of making more money. Typically, they'll try make this sound like actual advice, like "negotiate with your employer," "seek other opportunities" or the loathsome "find a side hustle."
So we'll get that out of the way immediately. Yes, having more money is a good way to owe less of it. That seems self-evident. Then again, if you had more money, you'd already have less debt. And "get a second job" is not exactly original advice, even if in the 21st century we try to make it sound more hip.
So, on to the useful advice.
2. Get a Picture of Your Debt
One of the unfortunate truths about debt is that, at a certain point, some people don't want to acknowledge it. They try not to look at it. They ignore the credit card statements that arrive in the mail and throw away student loan notices unopened.
They let the negative alerts from their credit score slide by. A form of apathy sets in. It can't get any better, you might think, so why should I watch it keep getting worse?
Because it can get better.
You can get out of debt, but the first thing you need to do is take stock of what you owe. It sucks, but gather those bills, statements and notices together into a comprehensive picture. The only way to fix this problem is to understand just what you're fixing in the first place.
3. Set a Target Date
Every good plan needs a deadline. Paying off your debt is no different.
Once you have a sense of everything you owe, to who and at what interest rates, set a goal for when you want to have it all paid off.
Try to walk the line. Don't be too conservative, but don't be too generous either. You don't want to keep paying this off for the next 20 years of your life, but neither will you do yourself any favors with unrealistic ambitions. Typical targets are three, five or 10 years to get completely debt free.
With the help of an interest rate calculator you can figure out exactly how much money it will take to pay off all your debt on your timeline. Divide it up into monthly amounts.
Now focus on that number. Don't look at the huge, scary total, just look at your monthly bill. That's all you need to worry about.
4. Review Your Spending
Now that you've pored over your debt, pore over your spending. Look at your credit card and bank statements and think carefully about how you spend your money.
Take advantage of tools like Mint or the budgeting suites that many banks now offer online to build a picture of where your money goes each month. Do you spend a lot of money on food and groceries? Have you noticed a surprising amount of cash going towards the iTunes store? Should you maybe cut down on time at the bar?
Until you look specifically at how you spend your money you won't know where it all goes. That will be essential, because the next step is to:
5. Make a Budget
Once you have your monthly debt spending, it's time to start budgeting around it.
This is one of the most important things you will do to get out of debt.
Getting out of debt is like going on a diet. You can't vow to simply "do better." It will never work. Instead, you need to establish good habits and the guidelines you'll use to stick with them.
A monthly budget will help you do that. Lay out all of your income and your expenses. Plan for the areas in which you'll cut back and the things that you absolutely cannot do without. Look clearly and carefully at how you'll reach your monthly debt spending number, because the only way this will happen is if you do it intentionally.
And leave some room in there for fun. Don't build a punishing budget that strips away everything you enjoy in life, for two reasons. First, you're not a machine. You deserve to see a movie or have some eggnog on the holiday. Second, if you push yourself too hard you're likely to snap. An austere budget is unsustainable in the long run, which means you're likely to fiscally starve yourself for a couple months before slipping right back into all your old habits.
Many financial advisers recommend allocating 20% - 25% of your budget to paying down debt. For many people this is a sustainable number, and sustainability is what you want to focus on.
How to Lower Your Interest
Compound interest is one of the most powerful forces that is keeping you in debt.
It may be true, but many borrowers still ignore it.
Most people in debt didn't get there by choice or accidentally. Debt usually happens because of circumstances outside of your control. You want to attend college but don't happen to have $50,000 per year just lying around. Your money ran out before the end of the month. A medical emergency hit or the car needed repairs.
In those cases, interest just doesn't seem important. You're taking the loan anyway.
Now it's time to focus on it. Try to get interest rates down as much as you can. This can involve:
Call your credit card companies, bank or student lender to ask about renegotiating your rates. For borrowers who still have good credit, this can succeed more often than you'd think, as the lender might prefer to offer you a better deal than see you reconsolidate with someone else.
2. Transfer Your Credit Card Balance
Credit card interest can spiral out of control. If you've missed a payment, or even run late, it can soar as high as 20% or more. You don't want to keep paying that.
Look into transferring the balance of your existing cards onto a new credit card. Balance transfer credit cards, in particular, are a product designed specifically to help you get a lower interest rate on existing credit card debt. It's still a credit card, so handle it cautiously, but this can be an opportunity to slash down a usurious interest rate.
Ask your lenders about refinancing options. Similar to renegotiating your loans, your lender may be willing to refinance at a lower rate depending on your credit and their options. If so, you could save yourself plenty of money in interest payments.
4. Discuss Income-Based Repayment for Loans
Student debt has a variety of options for income and need-based repayment. These programs set your minimum monthly payment to an amount based around your monthly income, not your total debt, and are intended to ensure that your payments never get out of control. (Of course, when you have five different lenders all taking a percent of your income each month, it still has a way of adding up.)
If student debt is a part of your package, call your lenders and ask about this. It may be an easy way to lower your monthly payments in one quick phone call.
5. Review Your Options for Consolidation
Consolidating debt can be an extremely powerful tool, but it's one you should use with care.
When you consolidate debt, you essentially take out one new loan and use it to pay off all of your existing ones. Ideally this allows you to turn a series of outstanding bills into one monthly payment. Even more ideally, it may let you do so at a lower interest rate than you paid before.
That's the best case scenario: You go from several monthly payments to a single, lower one at a better rate.
However, it can often come back to bite you. Consolidation is a standard personal loan, so it has none of the protections that come with products like student or medical loans.
Further, many consolidation packages come with potentially onerous terms. They can sneak in variable interest rates or balloon payments for borrowers who miss a payment. This isn't always the case, but it happens often enough that you should take care before reaching for consolidation as a first option.
6. Target Your Highest Interest Rates First
Not all debt is created equal, and you shouldn't pay it as though it were. Instead, you should use what financial advisers call the "snowball method."
What this means is, pay your highest interest rates first.
Take your monthly payment amount and use it to pay off all your minimums. Then take everything left and put it all towards your highest interest loan. Typically, this will be a credit card, but it might be private student debt or perhaps a bad auto loan. You want to get this paid ofF first because it's your most expensive obligation.
By paying off your highest interest loan you reduce your future payments. This is the loan that will cost the most in the long run, so it's the one you want out of the way fastest. Then pay your second highest rate loan, and so on down the line.
The only time you should really make an exception to this rule is when there's a vast disparity in principle. If one loan is only $1,000 and another is worth $45,000, then by all means, get the small loan out of the way quickly. Otherwise, target your most expensive interest rates first.
7. Track Your Plan
Once you've built your budget, negotiated your interest rates and set your goals, it's time to start your plan in motion. That means constant oversight.
You didn't think you were done, did you?
Keeping fiscal discipline means staying on track every month. The best way to do that is with a routine. Set yourself a date when you'll review your last month's progress. Go over your spending and personal habits to make sure you're staying in budget. Review your debt payments to make sure that you're paying everything off according to plan, and that nothing has changed to knock your timeline off course.
See if you can comfortably do anything to accelerate your payment schedule.
Remember, this is a marathon, not a sprint. Focus on your monthly goals. Make sure you keep them attainable and then meet them every four weeks.
You'll discover that those debt payments start disappearing sooner than you might have thought possible.