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Getting out of debt is a topic dear to my heart. As a younger man I used my credit cards without caution, even when I had the cash on hand to pay for things. Why pay now when you can pay later? I think of the Foghat song, “Live Now, Pay Later.”
Well… later eventually comes.

Fast forward about 10 years and suddenly I found myself tens of thousands of dollars in debt, barely able to even make the minimum payments on my cards. The worst part was that even when I did make the minimum payments, my overall debt still went up every month, even without charging anything new. The finance charges (and occasional late fees) outpaced the miniscule minimum payments.

Getting out of debt will take time, let’s get that straight. But it will go much faster if you have a plan. Paying a little more than the minimum every month on each of your debts will do next to nothing. Focusing your resources on one at a time and in the proper order will optimize your debt reduction, and get you out of debt years sooner.

Step 1 - Evaluate Your Debt
Take a look at the most recent bill from each creditor and write down the name of the creditor, minimum payment, and the interest rate you’re paying on each card. We don’t care as much about balances as we do about interest rates (APR).

Step 2 - Sort Debts by APR
List your debts from highest APR to lowest. So if you only had two cards, one with an APR of 24% and one with 17%, the one with 24% is going to be the one you’re going to pay off first.

Step 3 - Monthly Budget
Write down all of your expenses (including the debts you’re going to reduce). Don’t hold back. Be generous and honest. What do you spend on groceries, gas, utilities, etc.? It’s crucial that you come up with an accurate number. Don’t write down entertainment or optional expenses.

Step 4 - What’s Left Over
Subtract the total expenses from Step 4 from the amount of money you make every month. This is how much money you have left over every month.

If you find that you’re spending more per month than you make, you have a big problem, and debt reduction is impossible. You will have to look closely at your expenses and see where you might be able to cut back. Do you need the $100 cable TV package? Can you get a cheaper Internet package? Can you cancel your gym membership and workout at home? You get the picture. If you’re in that situation, you may have to really dig deep to even make it to even every month.

But let’s say you have $200 leftover every month. $200 really isn’t very much. You might easily blow that $200 dining out or bowling or getting your nails done, etc., and barely even notice. People find ways to spend their “extra” money.

But with thousands in debt, is it really extra?

You’re probably paying hundreds of dollars a month to credit card companies for stuff you may have bought years ago and may not even have any longer.

Extra money?

There’s no such thing when you’re in debt.

Step 5 - Applying the Surplus
You’re now going to take whatever portion of your monthly surplus that you can spare, and apply it to the debt with the highest interest rate. We want that debt paid off first. The more we pay the balance down, the lower the finance charge will be and the less you’re putting out in interest every month. So let’s say you want to spend $100 of your monthly surplus. You will pay $100 over the minimum on the 24% APR debt listed above. You will continue to pay that amount every month. If, for example, that card has a minimum payment of $50, you will pay $150 every month - even when the minimum begins to decline. You will continue to pay only the minimum on the 17% debt. You will do this until the first card is paid off. At first you won’t notice much of a difference. Eventually, though, you’ll start to notice the minimum payment AND the balance dropping quickly on card #1. This, my friend, is called progress. Once you start to notice a difference, I promise you’ll be fired up about debt reduction.

Step 6 - Moving to the Next Debt
Once that first debt is paid off, we are going to take that $150 we were paying every month and apply it to debt #2. So if debt #2 had a minimum of $35 a month, we will now pay $185 per month on it until it’s paid off. This card will seem to be paid off much faster, because we’re now attacking it with a huge chunk of cash every month. And the best thing is that you haven’t touched your monthly budget at all. You’re still putting out the exact same amount you were at the beginning.

Step 7 - Applying One-time Windfalls
If you come into any additional money, such as tax returns, Christmas bonuses, gifts, etc., these are great times to apply large one-time payments to your debt. Paying $1000 now could save you many thousands over time. Don’t think of what you could do with that extra money now, but how much you’ll have to pay if you don’t apply it to your debt.

Paying off your debt in this way, even if you have a dozen credit cards, will quickly start to snowball. The first cards will take some time, but the later ones will go very quickly. Even if you have a small amount to work with every month, don’t be discouraged.

Don’t be afraid to call your creditors and ask for an interest rate reduction. It’s worth a try, and the worst that can happen is that they’ll say no. I also suggest closing all of your credit card accounts except one. And the one you keep should be only for emergency. Maybe even leave it at home in a drawer so you’re not tempted to use it while out.

Be patient and consistent and your debt will eventually disappear. I personally used the plan above and was able to climb out of tens of thousands in debt. The feeling of accomplishment is akin to overcoming addiction or losing weight. It’s an achievement you will be proud of for the rest of your life.

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