Systematic Method to Get Out of Debt

If you are like most people, you have multiple credit cards and possibly some personal loans, not to mention car notes and mortgages. If you want to get out of debt, follow this systematic method to becoming debt free. It may not be easy, but it does work.

The first item you will want to do is sit down an understand what debts you have. Be honest with yourself. List out these debts in a spreadsheet or on a piece of paper. List them in order from the highest balances and highest interest rates. Once you have done this, sit back and take a breath. Yes, there is a lot of money on credit that you owe, but you can handle this!

There are two types of debt. Good debt and bad debt. When I say good debt, I mean debt that either you can use as a tax deduction (mortgage), or a debt that you incurred in order to better your job opportunities (student loans). Bad debt is our credit cards and personal loans. You might have purchased something on sale for $100.00 on credit, but by the time you finish paying it off, you will have paid $150.00 for that item that would have cost you $110.00 if you paid cash when it was not on sale. That is bad debt. You probably did not need that item, but you really wanted it and did not exercise the self restraint to wait to purchase when you had the money to pay cash.

If you are thinking that you do not have any extra cash to apply towards these debts each month, assess how much you are spending each month. Keep track of your purchases in a spreadsheet for a month. Keep the receipts, regardless of how small. You will be amazed at how much is wasted on little items each month. One basic example is your daily coffee. If you are spending $2.50 a day, five days a week, for your special cup of coffee, that adds up to $50.00 per month. If you buy coffee at the grocery store and make it at home, you will spend roughly $10.00 per month on grinds. There is a $40.00 payment found already!

So, let's take a look at your bad debts. The first thing to do is call the credit card companies and ask if you are eligible for a lower interest rate. If you have slow pays or past dues, they are probably not going to be able to reward your behavior with a lower rate. Be fully prepared for this reality. If you have been paying on time, even if it is the minimum payment, they might be able to help you out with a lower rate. Now that you have assessed your debts and asked for better rates, rerank your list. Now, if you were offered balance transfer options when you asked for a lower rate, this is the time to consider consolidation of some of the cards. Keep in mind that balance transfers tend to be considered cash advances and will have a transaction fee and daily interest. Consolidate wisely.

Once you have restructured your debts, list out the minimum payments due and due dates each month on your spreadsheet. Now, the debt that has the highest interest rate is your first plan of attach. Make the minimum payment on all the other cards and pay as much as you possibly can on the first card.

If you must use a card, pick one that either has no balance, is a convenience card (such as American Express - must be paid off each month), or use your debit card (can only spend what you have in your checking account).

Keep track of these debts on a monthly basis. It will help your mental state as you see your balances go down. You will realize that you are making progress towards your goal of becoming debt free!

One very important item to note, once a card is paid off, do not keep it. Call and close the account and cut up the card. You should only have one or two cards. If you need more in order to juggle your monthly expenses, you are spending more money than you make. If you cannot bear getting rid of the cards, put them in a plastic container, fill it with water, and put it in your freezer. They will be there if you have an emergency, but not easily accessed for daily purchases. If you microwave the container to get your cards, you will probably render them useless!

After all the cards are paid off, attack your next level of debt. This would be car loans and personal loans. Take the money you were paying towards the credit cards and apply it towards your personal loans and car loans. Resist the urge to have a new car once it is paid for. I like to drive an older car that is well maintained and paid for than I do a new car that I owe a ton of money on. Where else do you have a depreciating asset that you pay for up to 72 months to own, but it starts losing money the second you "take ownership" of it?

Once you have all these debts paid off, you will want to research the argument of having or not having a mortgage. There are two schools of thought. One is to not pay off the mortgage because you will miss out on your tax deduction (discuss with an accountant if you do not understand). The other is to have better cash flow by not having a mortgage to pay. Either way, it is a personal decision as to which way you wish to go.