5 Steps To Get Out of Debt

777 0

Every year, millions of Americans are faced with the daunting task of getting out of a mound of debt. Whether it's from student loans, credit cards, car loans, mortgages, medical bills, personal loans, or, in many cases, a combination of all of the above, having debt is a huge burden that can wear you down with stress and worry, and keep you from achieving your long-term financial goals. As impossible as it might seem, however, getting out of debt is possible.

According to financial expert Paula Pant, who has written for such publications as Forbes and Huffington Post, and runs her own successful financial blog, Afford Anything, getting out of debt is a process that takes planning and patience. No matter how much debt you are dealing with, or how desperate your situation may be, you can work to pay off your debts and get yourself back on track, financially. Follow these five steps to start paying off your debts today and keep climbing towards your goal of financial stability.

1. Make a list of your debts.

Like many other things in life, getting out of debt requires an action plan. To get started, sit down and write out a list of all of your outstanding debts. You should include the name of the lender or creditor, your total outstanding balance and interest rate, and the minimum payment amount you owe each month. This will help you visualize your financial situation and formulate a plan to start working to pay it off.

2. Circle/highlight the most stressful debt on your list.

Once you have all of your debts listed out in front of you, circle or highlight the one that causes you the most stress. This is the debt that keeps you up at night and that troubles you the most that you have to pay it back, or that it's taking you so long to pay back. You don't necessarily have to select the debt with the highest outstanding payment or interest rate, just the one that you really hate thinking about and that puts you in a bad mood when you do.

3. Star/highlight your smallest overall balance.

Now that you have selected the debt that causes you the most stress, next find the debt that has the smallest outstanding balance and highlight it (use a star or a different shape to distinguish between this and your most stressful debt).  Remember, this is the debt that has the smallest due balance associated with it, although it is entirely possible for this selection to be your most stressful debt as well.

4. Square/highlight your highest interest rate.

The last distinction you should include on your list is the debt that has the highest interest rate. Make a note of this debt by putting a square, or other such symbol next to it. You can also use different colors to distinguish between these debts we have just listed; just be sure to make a Key in the bottom-right-corner of the paper so that you know what you are looking at. Sometimes the debt with the highest outstanding balance will also be the one with the highest interest rate, but this is not always going to be the case.

5. Make a decision.

Now that everything has been outlined and you have an excellent visualization of your financial situation, it is time to prioritize your debts. In other words, you need to decide which debt you are going to pay off first. Although paying off debts one at a time might seem like a bad idea, spreading out money to cover all of your debts at a time will drastically slow your progress in paying off all of them. Instead, use your list to decide which loan you want to pay off first: the one that gives you the most stress, has the highest outstanding balance, or has the highest interest rate.

There really is no right or wrong answer here; it just comes down to personal preference. Starting with the debt with the smallest balance will help you scratch one of your debts off of your list faster, but paying off the loan with the highest interest rate will save you money on interest in the long run. If you would like more advice on repaying your loans, consult with your financial advisor, or check out more information from Paula at her blog at www.affordanything.com

Benjamin Carnahan
I am originally from Cincinnati, OH and lived and studied in Chicago, IL for 8 years after college before coming to the Twin Cities. I studied Liberal Arts at Saint Xavier University and am a freelance writer for Goals.com. I enjoy art, literature, and the outdoors.