How to Become Debt-Free in 2021


After the havoc that 2020 wreaked on our lives, many are hoping that 2021 will be a rainbow year. But while we have little control over the course of the virus, we do have control over how we order our lives – and specifically, how we manage our finances.

If 2020 was a tough financial year for you, go easy on yourself. From furloughs to layoffs, business shut-downs, and childcare challenges, managing a tidy budget was far from many people’s minds. In many cases, it was about survival: continuing to pay the rent or mortgage after a layoff, fighting off creditors when income was slashed in a furlough, or struggling to figure out what to do with the kids during the day and settling for out-of-budget private nanny care instead of utilizing the local daycare center. It was a hard year, and as such, not particularly primed for optimal financial decision making.

Now, however, a new year is approaching and with it, the promise of a vaccine and an end to the pandemic. As such, it is a great time to regroup and take stock of your finances and, if 2020 was tough on your wallet, to course-correct. Whether you find yourself fighting to make minimum payments or simply 9 months behind on paying your student loans, you can and will get back on track. Here are a few steps that will set you back on the path to debt freedom and financial security in 2021 and beyond.

1: Take stock

If you buried your head in the sand this year, that’s okay – but now it’s time to shake off the dust and see clearly again. Take a careful look at your statements, interest rates, contracts, spending patterns, and financial habits. Make a list of all your balances, creditors, and interest rates. Take some time to figure out where you went off the rails, and why. You cannot correct the situation if you don’t know where you stand, so make sure you don’t skip this step: it may feel uncomfortable, but it is well worth your time to understand your situation and what debt challenges you are facing.

2: Negotiate your interest rates

If your debt is primarily made up of credit card balances, it’s worth spending some time trying to bring your rates down. Credit cards carry notoriously high interest rates, so if you fall behind, much of your monthly payments will apply to your accruing interest amounts. This reality can make it extremely difficult to get out of debt.

The best way to accelerate the payoff process is to reduce your interest rates so you can catch up on paying the debt principal. Start by calling the credit card companies who hold your cards and asking if they can reduce your APR. If they won’t do it, or if the reduction is inconsequential to your overall debt load, you can consider another approach. In some cases, you may be approved for a balance transfer credit card with a promotional rate, allowing you to pay your debt with 0 interest. You may owe a 3-4 percent balance transfer fee, but this will likely be far less than the interest rate you would pay on your cards. However, be aware that you will need to pay the debt down before the promotional rate expires, or else your rate could increase significantly, putting you in a worse situation than before.

Another option is to apply for a personal loan. This may enable you to pay off your credit card debt – interest and all – on a lower-interest loan. You will then repay this loan on a slightly more forgiving payoff deadline. This approach is not without its pitfalls either, though, so be sure to do your homework before applying for one.

3: Choose your debt payoff approach

If you used a balance transfer card or a personal loan to pay down your credit card debt, you will simplify and streamline your payoff approach, particularly if you carry debt on several different cards. Another option, though, is to pay your debts one by one.

A common approach is to start with the loan with the highest interest rate, then redirect your funds to the other cards. Another approach is the “snowball” approach, which involves starting with the card with the smallest balance and working your way up to the others. Some financial experts believe this is the best approach because quick wins will motivate debtors to stay the course in their payoff plan. Others disagree, arguing it is preferable to knock out the most rapidly-accruing interest first to save money over time. You will simply need to decide which approach is best for your financial situation.

4: Set a budget

Your budget is your new best friend. Especially if you had a hard financial year, this is your time to get serious about budgeting, and in particular, ensuring it allocates sufficient funds to paying down your high-interest debts. If you can cut discretionary spending from your life, do it. If you can earn more money by negotiating a raise or side-hustling, do it. Whatever you can do to ensure you are pouring into your highest-interest amounts, make sure you commit to it. It is temporary, and it will pay dividends in the long term.

Additionally, it is worth spending some time to figure out what got you into debt in the first place. Was it overspending? Failing to budget? Was it something beyond your control, like a job loss or medical emergency? Not matter what it was, make sure you understand what happened and why, and how you can correct your course in 2021.

Finally, monitor your progress. After you set your budget, be sure to review it periodically to see if you are complying with it. If you need to make adjustments, do so – but make sure these adjustments are in alignment with your financial goals, not “this is too hard so I am going to loosen up.” Seeing good progress will motivate you to keep moving forward, and detecting problem areas will give you the opportunity to change your habits before the situation worsens.

5: Consider reaching out to a debt relief company

From tactics like credit card consolidation and debt settlement, in some cases, a debt relief company can help you get out of credit card debt faster than you would on your own. Consider exploring accredited agencies in your area to see what they offer and if you could benefit from engaging a professional. There is absolutely no shame in asking for help.

Setting the stage for a debt-free future

There are few problems so severe that they lack solutions. Debt is one of them. From personal accountability to budgeting, negotiating with creditors, and engaging professional help, there are tried-and-true ways to get out of debt: it might just take a little bit of time and a lot of effort. Nonetheless, debt freedom is an option for you in 2021. Just commit to a year of challenges and sacrifices. Fortunately, though, 2020 has already taught us so much about that, so you are already well-equipped.