‘Getting out of debt’ can seem quite daunting to most of us. It can seem like a never attainable goal. And hence a lot of people avoid setting this goal. We just put this goal on hold and continue living our lives and keep adding new debt to our already accumulated debt.

On the contrary if you take a step by step approach, getting out of debt can become a fun goal to aim for.

There are two types of debt - Good Debt and Bad Debt. Good debt creates value - examples are mortgages, margin lending. Bad debt is debt acquired to buy disposable items, durable items or items that depreciate in value - examples are car loans, furniture loans. In this post when I talk about debt reduction, I am talking about reducing your bad debt.

Below, I have outlined the steps you need to follow to make your bad debt elimination dream a reality:

Set Goals

You first need to set a goal to eliminate your debt. You need to sit and write down all the debts that you want to pay off. You then need to give yourself an end date. A goal without a date is just a dream. Consider the following two goals:

‘I want to pay off my debt by 2011.’
‘I want to pay off my debt.’

First goal is definitely more attainable than the second goal. But keep the end date realistic.

Stop Acquiring New Debt

If you can’t afford something then it can wait. You don’t need to acquire more debt to buy yourself or your family something that you cant buy without acquiring new debt.

Stop Using Credit Cards.

Cut all your cards off. But of course if you absolutely need credit cards then thats okay. Having a card is not a sin. I don’t advocate having multiple cards though. I also advise that use your card wisely.

Consolidate Your Debts

If you have multiple debts then consider consolidating all of them into one big loan - all your credit card loans, personal loans into one big loan. But having said that consolidating debt does not always work in your favour. Read one of my earlier posts on debt consolidation to understand its pros and cons.

Cut Down On Your Expenditure

There is no gain without pain. Don’t spend on something unless you absolutely need it. No more impulse buys. Keep your goal in mind. Keep reminding yourself of how happy you would be once your debt is eliminated.

Just Ask

Not for money but for lower interest rates on your debts. This is an often overlooked step.

Which Debt First?

If you have not consolidated your debts into one big debt then the question is which debt should you concentrate on first. Every month pay off the minimum repayment amount for all your loans. And then the remaining spare money you have, must go into one loan.

It makes financial sense to pick the loan with highest interest rate. Pay this off first and then go for the next high interest loan. But the problem with this financially sensible approach is that a lot of people find it a bit demotivating. If the loan with the highest interest rate, also has a huge balance then you will be forever be paying off this loan. So it can be motivating to pay off the loan with the least balance first. This way you can pay it sooner and this will give you a psychological boost. It all depends on you - if you don’t need any motivation and are quite focused then pick the one with the highest rate otherwise pick the one with the lowest balance.

Go on…Don’t procrastinate. Get started on your debt reduction journey right now !!!

If you have any tips or strategies or personal stories about debt reduction, go ahead and share it with us.

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Topics: Saving Money |

One Response to “Getting Out of Debt”

1. Mathew Davis Says:
   December 24th, 2008 at 9:29 am

   Thanks Sandy for this informative post. I was in a pathetic situation when one of my friend referred Bills.com, which provides consumers with information and interactive tools dealing with debt relief options. Their financial expert’s advice helped me in consolidating my loans.
   Happy X’mas Sandy.

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