The average individual will normally experience borrowing on some type of credit at some point.

And that’s okay! It might sound strange, but not all debt is “bad.” Certain types of debt can actually provide opportunities to improve your financial future.

Good debt should ideally be in low amounts, low cost, help you achieve your financial goals, and have potential tax advantages. For example, mortgages and student loans with relatively low interest rates and favorable terms are generally good debt.

On the other hand, loans with high interest rates or when you borrow more money than you can handle is generally bad debt. Credit card debt and some auto loans are generally bad debt.

Whether it is dealing with credit cards, student loans, or car loans, debt can be financially, mentally and emotionally stressful.

Below are the top 5 tips on how to get out of debt.

1. Establish a $1,000 Emergency Fund

This is an important first step before trying to get out of debt. Having an emergency fund will help keep you from getting deeper into debt when unexpected events happen. For example, if you have some cash set aside and your car breaks down, you likely won’t have to put that repair on a credit card. Ideally, you will want to get to the point where you have an emergency fund worth three to six months of expenses so you can support yourself temporarily if you suddenly lose your job, but the $1,000 is a great start!

2. Prioritize Paying Off Higher Interest Loans First

Compounding interest is great for investments… but not so much for debt. Compounding interest works against you as interest builds upon growing outstanding balances. This means that the longer you hold higher-interest debt, the harder it is for you to get out of debt. A higher-interest debt will cost you much more over time and should be your highest priority in paying off. For example, typically credit card debts will have the highest interest rates, so those should be your number one priority.

3. Transfer Credit Card Balances

The average credit card interest rate is 17% per the Federal Reserve’s Consumer Credit Report released in 2020. However, some credit card companies offer a 0% interest rate on balance transfers and purchases for 12 to 15 months. Transfer your balances on high-interest credit cards to an interest-free (or lower-interest) credit card. This obviously does not get you out of debt, but at least you are temporarily saving by paying less interest.

4. Negotiate With Creditors For Lower Interest Rates

If you’re having difficulty paying off your debts, you may contact each credit card and loan provider and negotiate a lower interest rate. You might be surprised at how understanding some lenders can be, especially if you’re a long-term customer. It’s at least worth a try – the worst that can happen is they say no.

5. Use the Cash Budget System

Obviously the best way to get out of debt is to spend less money so you can pay off your loans. But spending less can be easier said than done. One of the most effective ways to budget to eliminate debt is using the cash budget system. This is where you place a predetermined amount of money in different envelopes (or bank accounts) labeled with different spending categories. For example, $100 per month for retail/clothes shopping, $200 per month for going out/entertainment, etc. Anytime you spend within a category, the money must come from the corresponding envelope or bank account. When the money is out, it’s all out, and you can’t overspend.

Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.