How to get out of debt, step by step
An orderly, jargon-free method for cutting your debts: knowing what you really owe, deciding what to pay first, avoiding the expensive mistakes and keeping the pace to the end.
An orderly, jargon-free method for cutting your debts: knowing what you really owe, deciding what to pay first, avoiding the expensive mistakes and keeping the pace to the end.
Step 1: put every debt on the table
You cannot climb out of a hole without knowing how deep it is. Make a list of every debt: who you owe, how much is left, the monthly payment, the interest rate (TAE, the Spanish APR) and the end date. Include the uncomfortable ones: revolving cards, payday-style loans, money from family, deferred purchases. This inventory is the basis for everything else.
- One row per debt: outstanding amount, payment, rate and end date
- Do not forget revolving cards, purchase financing and private loans
- Add up two totals: total outstanding debt and total monthly payments
Step 2: work out your debt-to-income ratio
Divide your monthly debt payments by your net income. Below 30% is considered manageable; between 30% and 40%, watch it; above 40%, cutting debt has to be your economy's priority. This number tells you how urgent your situation is and doubles as a progress tracker month on month. You can work it out in a minute with our debt ratio calculator.
- Ratio = monthly debt payments ÷ net income
- Under 30%: manageable · 30-40%: watch it · over 40%: absolute priority
- Repeat the calculation every month: watching it fall is the best motivator
Step 3: pick your method — avalanche or snowball
With the inventory in front of you, pay the minimum on everything and concentrate every spare euro on ONE debt. Which one? The avalanche method goes for the highest rate first: it costs you the least money overall. The snowball method goes for the smallest first: mathematically it loses to the avalanche, but closing debts early gives a motivation that gets far more people to the finish. Both work; pick the one you will keep up.
- Avalanche: highest rate first — the mathematical optimum
- Snowball: smallest first — the psychological optimum
- Either way: minimums on everything, and all the extra on a single debt
Step 4: renegotiate, but with the calculator in hand
Before accepting a consolidation or extending a term, do the maths. Lowering the payment by stretching the term almost always means paying considerably more in total: it is only worth it if you genuinely cannot make it to the end of the month or if the new rate is clearly lower. With revolving cards, ask in writing for the amortisation schedule and consider clearing them with a personal loan at a lower rate. And be suspicious of any solution that asks you for money up front.
- Lower payment + longer term = normally more total interest
- Revolving: ask for the schedule and look to replace it with cheaper debt
- Never pay up front to anyone promising to fix your debts
Step 5: stop the drip with a simple budget
Getting out of debt while generating new debt is filling a bath with the plug out. A 50/30/20-style budget (adapted to your situation: while you are cutting debt, the 20% for saving becomes the 20% anti-debt) gives you a ceiling on treats and a fixed monthly amount to pay down with. Also keep a mini-buffer of around 1,000 EUR so that one surprise does not send you back to square one.
- Split your pay with the 50/30/20 calculator
- The savings block becomes your anti-debt budget
- A mini emergency fund first: surprises do not give notice
Step 6: automate the plan and watch the progress
The difference between a good plan and a good intention is the follow-up. Set up the repayments as an automatic transfer the day after you are paid and check three figures once a month: total outstanding debt, debt ratio and money freed up. mPF connects your accounts and shows you all three on one screen, with your debts and their trend always in view.
- Pay down by automatic transfer the day after payday
- Monthly review: total debt, ratio and payment freed up
- In mPF you see your debts and their trend without spreadsheets
Frequently asked questions
Pay off debt or save first?
First a mini-buffer of around 1,000 EUR for surprises; after that, all the effort goes to expensive debt (revolving, payday-style loans, cards). Once what is left is cheap debt, such as a mortgage at a good rate, you can combine paying down with saving and investing.
Which debt do I pay first?
If you go by the maths, the one with the highest rate (the avalanche method): it is the one costing you most for every month it stays alive. If you need quick wins to avoid giving up, the smallest one (snowball). The only non-negotiable is concentrating the extra on a single debt while paying the minimum on the rest.
Should I consolidate my debts?
Only if the total interest on the new loan is lower than on the debts it replaces and the fees do not eat the saving. Consolidation lowers the payment mostly by stretching the term, and that usually makes the total more expensive. Do the maths before signing and compare the total cost, not the payment.
How long will it take me to get out of debt?
It depends on your debt ratio and how much you can put towards paying down each month. The honest way to find out: do the step 1 inventory, set your monthly anti-debt amount with the step 5 budget, and divide. You will see the real horizon, and every monthly review will bring it closer.
What if I cannot even make the minimum payments?
That is the moment to talk to your creditors as soon as possible about renegotiating payments, and to seek specialist help: in Spain there are mechanisms such as the Ley de Segunda Oportunidad (second chance law) for insolvency situations. Do not let it drift: late-payment charges grow fast and your room for manoeuvre shrinks every month.
The method works when you can see the progress
Avalanche or snowball make no difference if you stop looking after two months. mPF gathers all your debts on one screen and shows you how much the total drops each month: that is what makes the plan hold.
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