How to Get Out of Debt in 7 Baby Steps

"How can I get out of debt?," you may ask. Deep down, you know that debt is a financial bondage. It is a difficult task, admittedly, seeing that the debt may be massive. Yet, if we take baby steps, we will eventually get out of it.

How Much Debt Does the Average Person Have in the US?

The Lexington Law Firm wrote, “Average consumer debt per capita is approximately $12,687 (total consumer debt as of November 2019/total US population as of January 9, 2020). . . Average loans per student equal approximately $82,170 (total student loans in September 2019/total students enrolled in public or private universities in 2019).”

Forbes wrote in February 2020, “Student loan debt in 2020 is now about $1.56 trillion. The latest student loan debt statistics for 2020 show how serious the student loan debt crisis has become for borrowers across all demographics and age groups. There are 45 million borrowers who collectively owe nearly $1.6 trillion in student loan debt in the U.S. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans.”

The Latest Report From the Federal Reserve

In September 2020, the Federal Reserve published that U.S. consumer debt rose by 4.7% to $4.16 trillion.  Right before the pandemic and recession set in, consumer debt had hit a record of over $4.2 trillion in February 2020.

The total outstanding consumer debt is a combination of revolving and non-revolving debt. Revolving means it’s meant to be paid off each month— like credit cards. And non-revolving means that it’s meant to be held for the life of the underlying asset— like cars, and student loans.  The Federal Reserve in its G-19 report does not include mortgage loans as debts in the above figures since they are considered real estate investment.

Sept 2020 (when not seasonally adjusted) showed that the total consumer credit outstanding is $4.14 bln, of which $988.6 bln are revolving and $3,172.7 are non-revolving. And of the non-revolving, a record $1.6997 bln are student loans, and $1,2229 bln are for motor vehicle loans.

May 2008 shows the highest credit card debt $1.0 trillion, as encouraged by the 2005 Bankruptcy Protection Act, which by making it harder to declare bankruptcy may have led to the 2008 recession.

A Growing Problem

According to a study by Experian, “Overall, consumer debt in the U.S. has grown 19% since 2009 to its current record high of $14.1 trillion, according to Experian data. And as debt in aggregate has grown, so have the totals in nearly every debt category—with some, such as student loans, more than doubling in that time.”

• Mortgage loans: Mortgage debt is at an all-time high of $9.6 trillion.
• Auto loans: Auto loan debt is at a record high of $1.3 trillion.
• Student loans: Student loan debt is at a record high of $1.4 trillion.
• Credit card debt: Consumer credit card debt is at a record high of $829 billion.
• Home equity lines of credit (HELOCs): HELOC balances total $420 billion.
• Personal loans: Personal loan debt totals $305 billion.
• Retail credit card debt: Retail credit card debt is at a record high of $90 billion.

Undoubtedly, debt is a serious problem, but how can it affect us personally?

What are the Dangers of Staying in Debt?

• Emotionally overwhelming life: You may worry about your future, your life, your security.
• Poor health from lack of sufficient sleep: You may feel trapped with nowhere to turn as you loose sleep and your health over your financial burdens.
• Lack of options: What you purchase, where you go for vacation (if you can!), how you live, and what you do may be limited by your debt.
• Marital/family problems: Financial stress often lead to relationship problems.
• The problems are endless.

What are the Benefits of Getting Out of Debt?

• Ease: You can breath easily without any financial pressure.
• Family cohesion: You can spend time and energy to build up family unity.
• Health: Your health and sleep are undisturbed by economic upheavals.
• Freedom: You are free to choose a lifestyle that you desire.
• Mobility: You are free to relocate/travel as you desire.
• Generosity: You can donate time, money, and energy as you choose.
• Secure retirement: You can look forward to finishing strong.
• Legacy: You can leave a bountiful inheritance to your children and grandchildren.

Ramsey’s 7 Baby Steps to Get Out of Debt and Build Wealth

To get out of debt and to build wealth, renown Dave Ramsey has developed the following 7 Baby Steps. They are to be taken in the order given in the sequence below.

1. Save $1,000 ASAP for your starter emergency fund.
2. Pay off all debts (except the house.), starting with the smallest to the biggest.
3. Save 3-6 months’ expenses worth of money as an emergency fund.
4. Invest 15% of your household income in retirement savings.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give.

I would also add that steps 4-7 can be done simultaneously and that they are better accomplished through investing in such vehicles as precious metals, in stocks, in affiliate marketing, in real estate, and other businesses. The bigger the return on those investments, the faster and better you’ll be able to fund your children’s education, pay off your mortgage and build wealth.

Debt is financial bondage. Decrease your expenses and save. Free yourself as soon as possible. Then you can work towards achieving financial freedom. Start today!