My 5 Steps to Get Out of Debt

Being debt free is a major goal for so many people. If you have consumer debt you’re overspending and to make things worse, you’re paying interest for overspending.

According to the Financial Review, in May 2021 ‘31 per cent of Australians reported being under financial stress, meaning they had difficulty paying for essential goods and services. This was higher than the 26 per cent who say they are “just making ends meet”’. In March 2021, the Financial Review also reported that ‘[b]orrowers with high levels of debt-to-income experience high levels of mortgage stress and are more likely to default’.

Good debt, bad debt … life debt

I don’t buy into ‘good debt’ or ‘bad debt’. While many financial commentators talk about these two types of debt, for me it’s all one category: the category of ‘I’d rather not have it or need it’. When you hear other ‘money people’ talk about ‘good debt’ and ‘bad debt’, it can be summarised as good debt where the interest is tax deductible as the debt is secured against an appreciating asset and bad debt has interest (usually quite high) that is not tax deductible and the debt is not secured against an appreciating asset or any asset at all.

I believe there is a third category of debt, which I like to call ‘life debt’. This debt is sometimes just part of a functioning life in our society. This type of debt is not tax deductible, but it doesn’t fit into the two traditional good/bad categories of debt.

I’m a bit basic and love steps, so here are my five steps for getting out of that consumer debt hole.

You must hit rock bottom

You must decide and agree with yourself (and maybe your partner, if you have one) that from here on in there will be no more consumer debt in your life. The reason you must first decide that enough is enough is because it’s honestly a waste of time and energy if you start trying to get out of debt and when the next flashy item appears you’re straight back to using debt to make a purchase. You need to reach a point where you decide that debt is negative, self-limiting and that it should have no place in your life from now on.

Get your money systems in place

Since you have decided that you are done with debt and never looking back, your focus should now shift to setting up a good cashflow management. Everything we do in personal finance and building wealth is based on the fundamental principles of spending less than we earn, having a good cash flow system and investing for the future.

Focus on building an emergency fund

You don’t want to fall back into debt once the debt repayment campaign has started. You are now going to move all your debt repayments (including your mortgage, car loan, personal loans —everything!) to minimum payments only and focus on getting $2000 saved as an emergency fund in a dedicated online savings account. Once your money system is in place and your debt is on minimal repayments, the leftover money will be going to building your emergency fund of $2000.

Commence the debt snowball

I feel I need to be a bit brash when talking about the debt snowball strategy because it may feel like it conflicts with your own intelligence, logic and reason. Your (not-so-good) habits and behaviours likely got you into debt, so we need some (good) habits and behaviours to get you out of debt. I am about to ask you to pay off your smallest debt first, regardless of the interest rate. Truth is, it makes no sense to have debt and be paying interest on debt in the first place. Once this debt is gone, you will direct that extra amount to the next smallest debt.

Know your financial reason for living—smash that debt

Once you have your emergency fund at $2000, your financial reason for living is to clear debt. This is why the mindset part is so important. You need to be strategic and only focus on paying down debt. This could take many months, so it is important to be ready for this long journey. The harder you work and the more you sacrifice, the sooner you will be out of debt

The person in the mirror is the only one who can change your situation. You have decided no more debt. You have put a spending plan in place. You have built your emergency fund of $2000. You have got your debt snowball plan.

Edited extract from Sort Your Money Out & Get Invested by Glen James (Wiley, $32.95), available 1 October where all good books are sold.

Glen James, author of Sort Your Money Out & Get Invested (Wiley $32.95), is a retired financial adviser and host of the top-rating my millennial money podcast. With his own personal financial success behind him, Glen has a passion to help people achieve financial freedom as he has. His teaching method is light-hearted and fun while still managing to cover sensitive and important topics in an engaging way. Glen speaks to regular people & financial planning professionals at various events nationally and is a regular contributor to a variety of national money publications.