For many borrowers, debt can be summed up in nine words: easy to get into, hard to get out of.
Americans collectively owe $18.8 trillion - the majority in housing debt (mortgages, home equity loans and the rest) and $5.2 trillion in credit cards and loans, according to the Federal Reserve. This works out at $94,000 per U.S. adult, on average.
Being burdened with debt can be a harrowing experience, particularly amid the current high cost of living.
“Those pressures weigh on their mental health, and when they don’t have the means to make ends meet, they may turn to credit cards, and racking up a balance they can’t repay causes stress and anxiety,” said Leslie H. Tayne, a personal finance expert and founder of Tayne Law Group.
For those struggling with debt, there’s one important step that could pull them out of a financial hole: taking inventory of what’s owed.
Know your numbers
The most important first step in overcoming debt is to get down in writing all the accounts you owe money to, experts said.
“I would suggest the first step to getting out of debt is to gain a true understanding of their current debt load,” Mary Sasmaz, an assistant professor in Case Western Reserve University’s accountancy department, told The Independent.
A borrower should make a written list of all their debt - personal loans, mortgages, credit cards, auto loans, student loans, medical bills, and buy-now-pay-later plans. Write down the following numbers for each account, Sasmaz explained:
- Balance
- Borrowing rate
- Monthly payment.
Typically, you can find each of these data points in your most recent statement or by logging onto your online account.
“This is what I call the ‘in the know stage’, which takes a lot of effort, but it’s essential to building a plan and starting to move forward,” Tayne told The Independent. “You simply have to know what you are working with to really begin.”
To be thorough and make sure your debt-clearing journey gets off to a good start, set aside time to gather these numbers when distractions are minimal, Tayne said. Bringing your family and even good friends into the process can be a huge help, too.
“Ask for help from a trusted friend or family member if it feels overwhelming,” she said. “When you have someone dedicated to helping you, it can feel supportive, which eases the mental burden, but also helps keep you accountable and make sure the task gets done.”
Meaningful mindsets
While debt is a numbers game, it’s the conversation in a borrower’s head that can have a significant impact on how successfully they are at paying off what they owe.
So, while taking inventory of all your debt accounts is the most important step in the process, pairing that step with sound mindsets will help borrowers continue in their debt-payoff journey.
Separating your identity from the debt is one of those mindsets, said Prisca Benson, owner of money coaching practice Our Green Life.
“A lot of people make having debt part of their identity, which leads to them experience shame and helplessness,” Benson told The Independent in a query. “When people shift their mindset so that debt is a part of their story, not their entire story, they can then approach it with a clear and focused mind.”
Knowing what is on the other side of that finish line is also important mental motivation, said Ashley Morgan, a bankruptcy attorney and owner of Ashley F. Morgan Law, PC.
“Do you want to use that extra money toward a vacation? A new car?” Morgan said in an email to The Independent. “Having a goal can make it easier to continue when things get difficult.”
Focus on the “why” behind debt payoff, said Kristine Stevenson Seale, owner of tax resolution and financial coaching firm Proverbs 16:16 LLC (a biblical reference to the importance of wisdom over wealth).
“It's very important to know why you want to get out of debt,” Stevenson Seale told The Independent in an email. “You'll be tempted along the debt-free journey, and if your 'why' is strong enough, you can resist the temptation to spend. Without digging deep into the why, your desire and ability to become debt-free can be derailed.”
That “why” could include breaking generational cycles of debt, improving mental health or freeing up money to build retirement savings.
If a borrower achieves becoming debt-free, the feeling is fantastic - but the whole cycle will start over if they don’t identify what initially put them in a financial hole, Sasmaz said.
“Paying off debt can be euphoric - feels like a weight taken off - but care must be taken to identify habits that may have led to significant debt in the first place so that the individual does not find themselves in a cycle of debt creation requiring significant debt management again and again,” she said.
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