Save. Spend. Splurge.

How to get out of debt in 10 steps

I feel like this topic has been flogged to death but that’s because I’ve been blogging about money since 2006, so I understand that for newcomers this is totally overwhelming and confusing!

Here’s my 10-step plan for getting out of debt:

  1. Find out how much you own (assets)
  2. Find out how much you owe (debts)
  3. Find out how much you make (net) as an income per month
  4. Create a budget based on that (net) income
  5. Track your daily expenses for at least 3 months against that budget
  6. Set aside at least $50 – $100 a month for peace of mind
  7. Stop using credit cards and use debit cards or cash instead
  8. Review & adjust your budget each month
  9. Put all your excess cash towards your debt
  10. Clear off your highest-interest rate debt FIRST, then snowball the payments to the next

If any of that sounded confusing, read each step in detail below:


What do you have in the bank?

Do you have a car?

A house?

What do you own?


Now that you know what you have in assets, or what you own, ask yourself if you need to keep them.

For instance, if you can take public transit because you’re lucky and live in a metropolitan city (even though taking the bus sucks and is gross to your psyche), you could easily sell your car and get rid of your car loan, car insurance payments, having to pay for parking, gas, etc.

Or if you have $5000 saved in a savings account but it’s only earning 0.25% interest compared to your credit card debt costing you 19% in interest each month, it’s pretty silly to keep that money in there.

Save $1000 aside for peace of mind and emergencies (and for goodness sake’s, move it into a high-interest savings account of at least 1%), and put the $4000 of savings towards your debts instead.


This is the part where most people give up, but you can’t do this!

You need to figure out the final number of how much you owe.

Gather all your bank statements, write down the current balance and its interest rate in one big table, add it all up, sit back and take a Xanax as you stare at the number.

It might look something like this when you’re done:

After you know what you own and what you owe, take what you own and subtract what you owe to get your net worth.

This number will probably be depressing and demoralizing (don’t give up!), but it will be a huge motivator as you climb out of debt, so you might want to keep this figure in mind.

And maybe this quote in mind too:



Gross Income = What they offered you as a salary for the year (annually)

Net income = What you actually get in your pocket / bank each paycheque.

Take for instance someone who earns $40,000 a year on paper in Ontario, it looks like this:

$40,000 = Your Annual Gross Income

$5892 = Your Annual Taxes in Ontario for 2013

$34,108* = Your Annual Net Income

(*Gross Income minus Taxes = Net Income)

We are interested in the NET INCOME number of $34,108 because there are only 2 sure things in life: death and taxes.

That $34,108 is for the whole year, so now we divide it by 12 to get it by month:

$34,108 / 12 months = $2842.33 earned net per month

Write this down somewhere because this is what you should be using as income to budget for each month.


Sticking with that $2842.33 per month your newly created budget might look something like this:


Still confused?

  • Read: The Ideal Household Budget for Spending

If your confusion stems from not actually knowing what you DO spend each month, I bring you to step #5:


You need a baseline of what you are actually spending versus what you think you are spending.

EVERYONE thinks that they spend less than what they think they’re spending.

EVERYONE. Including yours truly.


You think you’re only spending $50 on eating out?

Watch that number grow a fat 0 on its ass and you’ll freak out that it’s actually $500 a month because you go out for wings every Friday with the guys, but then you also buy lunches at work, or takeaway at night when you’re too tired (lazy?) to cook.

If you’re in debt, track your expenses until you are out of it completely.

If you are not in debt, track your expenses for 3 months and then stop doing it if you don’t want to (just re-visit once in a while to make sure you’re still in line).


If you are disciplined with your money already, I would tell you to save $0 and just dip back into your credit cards if you need cash.

However I am guessing you are not (yet) disciplined enough to do this because you are in debt and frustrated, scared, angry and confused right now so I suggest you save some money aside.

Now based on that budget above, the suggested 10% amount is $285. It’s a lot of money each month to save, while it sits there earning 0.25% interest in some crappy savings account.

You have 3 options for Savings here:

1. Continue saving that $285 a month because it makes you feel psychologically secure and feel better (don’t knock it!)

2. Get out of debt much sooner and only save $50 – $100 each month, while funneling the rest of that money towards your debt instead

3. Continue saving that $285 a month but stop once you reach a money threshold like $1000 or 3 months worth of living expenses in savings (in this case it would be around $8500).

Then stop saving that $285 a month and channel it towards your debt.

Whatever you decide to do, make sure it’s the right choice for you.

Ignore what other people say about how dumb it is to save money when you’re paying double-digit interest rates because having savings and not having to dip back into your credit cards can be something really quite empowering for some people.

Plus.. it stops you from being tempted to take out more than you actually need for your real emergency.

By the way an emergency is not that you had to pay rent that month, or you need to buy new winter tires, or you should be visiting a dentist once a year and it’ll cost you $200.

You should have already thought about that in your budget and planned for it ahead of time.

An emergency is..:

  • You lost your job
  • Your spouse lost their job and you can’t survive on one income
  • You got into a car accident
  • You lost your glasses / something important that you need to function / work on a daily basis with
  • You lost your driver’s license and need to replace it

Emergencies are EXCEPTIONAL cases and EXCEPTIONAL situations; they are not recurring ones.


Again, if credit cards are your downfall, don’t use them.

As I mentioned above, if you are disciplined with your money you wouldn’t be reading this post. Since you are not disciplined (yet), avoid temptation as best you can and stop using your credit cards.


Do what you want with the cards — melt, burn, cut, ice them.. do what it takes to stop you from carrying one around and feeling tempted.

Until you can honestly trust yourself to use credit cards responsibly, don’t use them.


Every month assuming you are tracking your expenses, look at where you went over or under in each category.

If you notice that you actually spend more money for utilities than you expected, either cut back in this area, or compensate by taking the money from elsewhere in your budget to make up for the shortfall (e.g. in more of the “want” categories like clothing, entertainment, eating out.)

Don’t get depressed if you slipped and spent more than $50 on eating out.

Just accept that you did it, and try to NOT do it the next month by packing your own lunch, saying “No” to dinners out, or going out with friends but only for drinks.

Changing your habits and your lifestyle is hard work.

It never came easy to me (still doesn’t), and I doubt it ever will to anyone.

If anyone says changing in any way shape or form is easy, they’re liars.


Any tax refund you get, money you find on the ground, side income.. budget surplus .. PUT IT TOWARDS YOUR DEBT.

Don’t justify spending 50% of your tax refund on fun, and 50% on your debt.

Put 100% of it towards your debt.

I used to literally pick up coins (even pennies) off the ground, deposit them ASAP and then send a $0.10 payment towards my debt.

That is how seriously I took this rule.



It goes without saying that you should pay the minimums on all of your debts, and then put the excess money towards the highest-interest debt.

As an example here are what your debts might look like:

In the budget above, you had $525 to put towards debt each month:


After paying the minimum pound of flesh required by each creditor, you are left with $105 in excess.

Put it towards the debt with the highest interest rate, which in this case is Credit Card #1



*$130 + $105 = $235

You might be tempted to put it towards the lowest balance like Credit Card #2, but you are paying a LOWER interest rate of 19% on that card versus 25% but don’t do it!

It might feel satisfying to have it paid off completely but you’d be losing 6%* of your money each month if you did that.

(*25% – 19% = 6%)

After that credit card #1 is cleared your next step (snowballing) would look like this:



*$235 + $65 = $300

You would have taken that original $235 payment you made to Credit Card #1 and put it towards Credit Card #2, your second highest interest debt rate.

Now you’re paying $300 a month on a $65 minimum dollar balance.

After you’re cleared THAT card, move on to the third highest interest rate of 12% (your line of credit) and clear that next.

Wash, rinse, and repeat until you’re debt free.

And that’s how it’s done.



  • Old Mom

    Help! I have a 14 year old teenage daughter (too young to work much). It is so hard to keep any “extra” cash. She is just like my mother-in-law. If you asked either one of them what they would want from the mall right now, they would easily come up with a list of at least 20 items. I’ve never seen anything like it.

    • save. spend. splurge.

      @Old Mom: Well… I am not sure what help you are asking for, but I had a paper route when I was 7 and never stopped working since.

      “Too young to work much” for me, is something that you impose on your children based on what you have experienced. I know kids who weren’t allowed to work because their parents thought it wasn’t a good thing for children.. but it helped me learn how much a dollar is really worth when I had to work at minimum wage for it.

      I suggest you get her to start buying her own stuff that she wants, AFTER you sit down with her and budget out that all of her income is not disposable (e.g. as she gets older, she will have to pay rent, food, etc.. all out of that same salary, so a dollar earned is not 100% for wants only.)

  • jane savers @ solving the money puzzle

    Can I use my credit cards if I promise to pay them in full with each biweekly pay cheque? I love my cash back rewards.

    Moving stuff from my credit cards to my HELOC is part of the reason I have HELOC debt right now but I promise to never run the credit cards up again. I will be starting an emergency savings fund once the HELOC is gone in 6 or 7 months.

    • save. spend. splurge.

      @jane savers @ solving the money puzzle: Yes, yes you can. 🙂

      I use my credit card for everything, and I like PC points for groceries as well as 1% cash back.

      I will say though, if retailers told me: 1% off if you pay in cash, I’d switch to cash in a heartbeat. *shrug*

      Personally if you are able to be disciplined and clear your credit cards each time you spend on them (using it like a debit card, which is what I do).. I say go for it.

      If you are too tempted to spend on there (oh what’s a $1 here or there?) then no. I veto your use of cards!

  • MelD

    Definitely agree with your process but bemused at your interest rates…
    Just this morning we were feeling disgusted that interest rates on a regular account are now down to 0.05% and the best savings account you can get offers 0.5%, so dream on with 0.25/1% rates over here in Switzerland!! The fees are so high that even if you don’t touch your money, you lose out because they have to send you a statement at least once a year that is going to swallow up your interest unless you have a pretty large sum in the bank… There simply is no “good” solution any more (it was very different years ago!).
    If you are under 26 you can get a youth account with a 2% savings rate – lucky students!
    I don’t know what overdrafts cost in Canada or the US but we are currently at 11.75% (used to be around 7%). Not that we need it, just sayin’.

    • save. spend. splurge.

      @MelD: Oh my goodness!!!!!!

      I do not know how much overdraft costs here (never had to use it) but I faintly remember someone telling me you have to pay a fee per month just to use it… You have to sign up for it too.

      In Canada we have higher interest savings rates only for this year or so.

      Last year it was kind of low at 1% – 1.5%.. now it’s edging up higher to 2.5% but only until end of February, then it drops back down to around the 1% – 1.5% mark.

      It’s still better than your 0.05% in Switzerland….

  • Morgaine

    Great post! Very easy and clear to follow. One thing, if I may. This may not work for everyone but I found it helped me. I decided on a Debt Free Day (Gail says less than 3 years to avoid debt fatigue) and then figured out how much I would have to pay on my debt each month to get to that date. Then when I did my budget I put income – fixed expenses – debt repayment amount from above(+ any found money) – savings = money left for spending. Its easy to see what you have left over each month for debt repayment and just go along, but its a lot harder to sacrifice eating out or clothes shopping to get out of debt faster. Yes, some blips came up in my life so I didn’t meet my first DFD but it certainly made me more focused on the goal.

  • Cindy

    I love this. I’m going to pass it onto my friend Cadi cuz she’s interested in this topic.

  • Cindy

    I love this! Going to pass it to my friend Cadi cuz she’s trying to clear her debt <3

  • Mark Ross

    Great article! I really think debit cards are better than credit cards in terms of helping you do better with your finances. Credit cards will tempt you to spend, while debit cards cannot.

    • save. spend. splurge.

      @Mark Ross: Or cash. Cash seems to psychologically block people from wanting to spend it.. at least, that is it in my case.

      I prefer credit cards only because I have never had a problem with them and I want those grocery points or the cash back (1% equivalent), but I know it is easy to spend on them.

      • Mark Ross

        @save. spend. splurge.: Yeah. I forgot about cash. So, cash –> debit card –> credit card.
        I think that’s how one should spend or pay, check if he has cash, if not, use debit card, if his debit card is empty, then don’t buy anything, just kidding, one can still use his credit card every once in a while.

        • Caitlyn

          @Mark Ross:

          This is a pretty safe bet if you already have some kind of established credit (which, if you’re reading these posts to get out of credit card or loan debt then you should already have some kind of established credit, if maybe not the highest score/rating). However, if you are new to the financial world and you only ever use cash or debit cards then there may come a time when you want to take out a loan for something and you will be denied. I work for a bank in the US, so I’m not sure how it works in Canada or elsewhere, but we have had to turn down our fair share of loan applicants because they don’t have any established credit. And at least in the US, no credit is just as bad as bad credit in most cases. So just keep that in mind and if you’re wary of credit cards, maybe get a gas card or something similar where you’re still building a credit score, but you can’t go crazy and rack up a bunch of debt.

  • Dear Debt

    Great, inspiring post. I still save at least $100/mo just because I have so little fluid cash and absolutely nothing of value. I am trying to throw as much to debt as possible! I tried getting a credit card and after realizing my spending went up, I just use it for groceries (for the miles).

    • save. spend. splurge.

      @Dear Debt: I totally agree with saving SOME money aside. It can be really demoralizing seeing $0 in your bank account (not to mention any fees your bank might charge for that).

      Credit cards are easy to spend on, harder to pay off.

  • Charles@gettingarichlife

    Stop shopping or even browsing. Little purchases add up quickly.

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