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Back To The Basics: How To Get Out Of Debt

Are you ready to get out of debt? Great! Here’s one method that works. In fact, it worked for me!

  1. List all of your debts (including or excluding your first mortgage).
  2. Make your minimum payments (on time) each month.
  3. Send extra payments to a single account –
    1. The account with the highest interest rate (or)
    2. The account with the lowest balance
  4. Continue to make minimum payments and extra payments, until first account on your list is paid off.
  5. Take the minimum payment that you were sending to the first account, combine it with the extra payments, and send this entire amount to the second account on your list.
  6. Continue this process of paying off accounts, combining those minimums with extra payments, until you are debt free.

Click here to see an illustration of how this debt reduction process works.

Once you get a hang of the process, here are some additional ideas that you might want to keep in mind –

  1. If you get a chance to move debt from a credit card with a high rate to a credit card with a low rate – do it! But, only if you understand the terms of the balance transfer. (Be sure to figure in any balance transfer fees, before you pull the trigger.)
  2. In most cases, you do not need a debt consolidation company. If you will create a plan, and stick to it, you can get yourself out of debt.
  3. It NEVER hurts to call your credit card company and ask for lower rates. (Also, you can call your phone company, cellphone company, satellite provider, etc. and ask for discounts. The more money you save, the more money you have for debt reduction.)
  4. Every dollar matters. Even if you only have two extra dollars to send, send those two dollars.
  5. Before you start sending extra payments, be sure that you have some money set aside in a ‘rainy day fund’. The amount of money in this fund will vary, according to the size of your family. (You’ll need this fund, just in case you have a mini-emergency. This fund will keep you from having to use your credit card. I always kept (at least) $1000 in mine.)

16 thoughts on “Back To The Basics: How To Get Out Of Debt

  1. And stop eating out, sell the gas guzzling full-size Ford truck, don’t buy the coolest cell phone, don’t buy the newest ipod, no vacations.

  2. Is putting money in a ‘rainy day fund’ really worth it if we’re paying 16% on credit cards and, if a mini-emergency came up, we could just put it on the same credit cards anyway?

  3. Pingback: Weekend Linkage - January 27, 2007 | The Suns Financial Diary | A Personal Finance Blog on Saving and Investing
  4. Young – In my opinion, the mini-rainy-day fund is an imperative. I find, and this comes from 3 years of emails from folks who are in debt, is that people who put their
    credit cards away and refuse to use them are much more successful than those who don’t. That being said, to each his/her own. But, if you continue to give yourself a cushion to ‘fall back on’ — you’ll (more than likely) continue to fall back.

  5. I am convinced this is the best way to get out of debt, though I tend to lean towards a slightly larger baby emergency fund to cover major financial emergencies.

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