Yesterday, I told you about how managing debt is like surfing.    Simply put, if you stay ahead of it, you will have a great ride, but if you fall behind, it is very difficult to catch up.

I suppose the target audience for this advice is people who have yet to really accrue a lot of debt.      Those that are already in debt are most likely all to familiar with it’s problems.    Like smokers, they know they are trapped in an unhealthy habit, and most would like to quit,  yet they are just unable to do so.

Today, I will try to offer advice on how to get out of your debt and start surfing again.

First, Find Out What Your Debt Is Costing You

Sit down and look at your last statement for your credit card, auto loans, and any other debts (not including your primary mortgage or school loans).    On each statement, there is the amount of interest owed itemized in a separate column.     Add up all of those interest payments.     Then, multiply that total by 12.    That is the approximate amount of interest you are paying every year.    This figure is the prize that you are after.   It is the amount of extra income that you will have to save or spend once you retire your debt.

Next, add up all of the monthly  payments you are making on your debt including credit cards and car loans .   Again, don’t include your mortgage on your primary residence, or any education loans.    Now, imagine you have paid it all off and you have all that extra money to spend every month.    The likelihood is you would not need to accrue any more debt if you had your entire paycheck every month, after taxes, mortgage/rent, and any school loans.

Find More Money

Now that you know how much you will save every month by not having debt, hopefully you should be highly motivated to retire it as quickly as possible.   Face the fact that the reason you got into debt was that you were living beyond your means.   Maybe you had a good reason at the time, but that doesn’t matter now.    Your only goal is to reduce your ongoing monthly expenditures so that your can retire your debt as quickly as possible and stop paying interest.    As a side effect, you will vastly increase your financial security so that you are less likely to go into debt when future problems arise.

How do you find more money?    Cut out all unnecessary spending.   It’s ok to be frugal, in fact, it is in style now!   Eat at home more often.   Take your lunch to work.  Get your books and DVDs from the library.  Skip movies and enjoy said books and DVDs.  Cancel cable and use free, over the air, high definition digital television.   Work overtime or find some other part time work.  Drive less.  Rent a room in your house.   Go camping on your next vacation.   Skip the mall and buy clothes at discount stores.   Learn how to program your thermostat.    Sell your unused purchases on E-Bay or Craigslist.  Cancel your gym membership and take up running or bicycling.

There are millions of ways to cut your spending.   Leave no stone unturned.   Tell yourself that the most painful measures are temporary until you have retired ALL of your debt.  Paying off your debt sooner guarantees that you will have much more money later and more financial security.

Decide What Has The Highest Priority

The fundamental principle of retiring debt is to pay off the highest interest accounts first, and then the lower ones.   Credit card debt is most likely your highest interest debt, and should be paid off first for a variety of reasons.   By paying off your entire card balance in full every month, your interest on your purchases are waived, making it a very good option when a credit card is the best or only way to make a purchase, such as with car rentals and airline tickets.    If you qualify for a 0% balance transfer card, you should look into this.    Keep in mind, that 0% is only the interest and that you will likely incur a  3%  “balance transfer fee”.   If you have a much higher interest rate, and you can’t foresee paying off your credit card in the next few months, this is likely your best option.

Reversing The Cycle Of Debt

Once you have paid off your credit cards, keep the momentum going by paying off any other debts, especially your auto loans.   Strive to pay off more than the minimum payment every month with the goal of paying it off early.   This should get easier as you have already reduced your monthly expenditures and retired your higher interest credit card debt.   The more you pay off, the more you have left, and the more you can pay off the following month.    All of the sudden, the cycle of debt is reversed and you are ready to catch the next wave!

This entry was posted on Wednesday, June 10th, 2009 at 20:00 and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.