Updated Sep. 22, 2019. Originally published Jul. 16, 2013.

If you’re just stumbling across this, please click here for the other posts in the series.

Why are You in Debt?

As with the past few weeks’ posts, if you are not primarily responsible for the finances in your household, you may be able to skip this post.  However, you may want to work together with that person on this, just to be sure you’re both on the same page!  (Of course, if you have no debt, you can skip this – and kudos to you!)

How difficult a process this is depends in large part on two factors:

1) How much debt you have.
2) Why you’re in debt.

The reason I think #2 is so significant is that it probably has a significant impact on the funds you have available to reverse the debt.  (Unless you have just had a huge decrease in income and the decrease had nothing to do with the debt.)  If you are in debt largely because of foolish spending, that can actually be a good thing moving forward.  Why?  It means you can probably make significant headway with more disciplined spending habits.  If you’re in debt largely because needful expenses have ballooned (you had large medical bills, for example), it may be a longer road, because your income may not be sufficiently “padded” to allow for large amounts to be designated to debt repayment.

STEP 1: Examine why you are in debt, and how much you may be able to allocate toward paying down the debt.

Take a Second Look at Your Lifestyle

If you’ve created a budget, you should have a fairly good idea of where your money is going.  This should go a long way if you’re in the first category as far as where your debt originated.  But regardless of the “why,”  take a long, hard look at your current budget.  Are there areas you can cut?  (Keep in mind that small cuts in several areas can add up.  Also keep in mind that these don’t necessarily need to be permanent cuts.)  Can you feed the family on a little less?  Forego new clothing expenses for a few months?  Cut out the cable?  Get a less-expensive telephone plan?  Hopefully you get the idea.  Where can you reduce your spending?

STEP 2: Trim the budget anywhere you can, and designate the newly-freed-up funds for debt reduction.

Create Money

Okay, so you can’t actually create money.  (Not legally/ethically, anyway!)  But are there ways you can bring in a little extra?  Do you have belongings you can sell?  A marketable skill?  Can you freelance?  If you’re already doing something to bring in some household funds (besides a typical job, which you probably can’t change significantly), is there a way you can ramp it up, even temporarily?

STEP 3: Make a list of any ways you could bring in extra money to put toward your debt.

Make a Plan

Finally, you need a plan.  If you only have one debt, then it’s pretty simple: put any extra money you have available toward the debt, until it’s gone.  Most people with debt have more than one payment, though: perhaps multiple credit cards, or a credit card + medical bills…

There are two different schools of thought on this; feel free to do whatever makes sense for you.  The first says that (besides paying whatever minimum payments you have to make to avoid going to collections) you should start with the debt that has the highest interest rate.  Presumably the benefit here is obvious: you want to pay the highest amount of interest for the shortest amount of time.

The second train of thought makes less sense in purely mathematical terms, but is very popular because of its impact on human nature.  Dave Ramsey popularized the “debt snowball” method.  It’s called the debt “snowball” because once one bill is paid off, you roll the amount you were paying on that over toward the next bill.  This, of course, can (and should!) be applied regardless of which bill you start with.  But what makes this method different is that it recommends beginning with the smallest debt, regardless of the interest rate.

The logic behind this is that by starting with the smallest debt, you will see results sooner, and this will encourage you to stick with it.

STEP 4: Decide which method you are going to use, and list all of your debts (including amounts) in the order you intend to pay them off.  Put this with your other financial paperwork.

STEP 5 (optional): You may want to create some sort of chart or similar visual to track your progress, so you can be encouraged as you trudge through what is often a slow process. 

The typical “thermometer”  picture that fundraising programs often use is a good example.  Or an online “counter.”  Or whatever other visual will let you see that you are, indeed, making progress.

Have you paid off a debt?  Come tell us about it and let us rejoice with you!

If you’re just stumbling across this, please click here for the other posts in the series.