Your "Get out of Debt" Step-by-Step Roadmap

You've heard the old saying, "live within your means." Easier said than done for some. The important thing is that you've reached a point where you realize your life would be a lot less stressful if you didn't have bills to worry about. Short of winning the lottery, what can you do? Here's help.

Four rules to live by:

1. Be realistic! If you are spending $500 a month now on food, don't expect to cut your grocery bill to $100 next month.

2. Make gradual changes! Take small steps to cutting your expenses, say by 10% or so each month. You'll feel less deprived and more comfortable with the cuts. Then cut a bit more.

3. Question everything! Do you really need that impulse purchase? Will you feel better with that money in your pocket instead? Remember, little things add up, so even skipping one coffee stop or extra grocery item in your cart will make a difference in getting you to your goal of lightening your debt load.

4. Expect surprises! No one counts on their car breaking down or other unexpected occasions requiring payment NOW. Know that these invariably come at the most inconvenient times, and plan to build your crisis fund now.

Four steps to losing your "debt weight":

Step One: Gather all your bills and other related papers. Make a list of the following items:

  • Your balance on every account

  • The interest rate and whether it's tax deductible

  • Whether those interest rates can change, when and how

  • Whether there are any prepayment penalties for paying an account early. (More and more common with some home and auto loans)

Call your credit card company or lender and ask questions if you’re not sure. Write it all down.

Step Two: Decide how to prioritize your debt:

  • Separate your debts by interest that is deductible and nondeductible. Personal loans, credit cards, and car loan interest is not tax deductible. On the other hand, you get a tax break on the interest paid on mortgages, home equity loans and some student loans (depending on your income).

  • Now list your debts from highest interest rate to lowest. If you have a balance on a credit card that offers a low rate for a limited time, use the higher rate that will eventually apply).

Step Three: Set targets on paying off your loans.

  • Choose your highest-rate, nondeductible debt. Set your eyes on the prize of getting this one paid off entirely. Then move on to target #2.

  • While paying the minimum on your other debts, pay as much as possible on your target debt. Once you've paid off that debt, take the same amount of money and apply it to your next highest-rate debt and so on until your nondeductible debt is gone.

  • Now you can start tackling your deductible debt or possibly building your savings and investment account balances.

Step Four: Vow to live a debt-light lifestyle.

  • You cannot lighten your load if you are adding to it at the same time. So, you need to stash those credit cards (cut them up if you must) and don't apply for any new loans.

  • Cutting back and making sacrifices will be worth it to have your debt-stress cleared away.

This plan assumes that you are not already falling behind or in other serious credit trouble. If you are not able to make minimum payments or you’re behind on your debts, a visit with a consumer credit counselor in your area might be in order. Or, if things are really bad, you may need to talk to a bankruptcy attorney.