What Is the Best Way to Get Out of Debt?

By Nicki Howell

Overview

According to MSN Money, 1 in 20 Americans carry more then $8,000 on their credit cards. Interest payments on high balances add up quickly, and can make paying off debt difficult. And of course, there are other circumstances that saddle Americans with debt, such as rises in costs of living or unforeseen medical circumstances. But whatever the cause, to get out of debt you need a plan. Here are a few tips for getting out of debt, and staying debt free.

Step 1

Make a list of your expenses. This includes payments for rent, mortgage, utilities, transportation, credit cards and any other money that goes out each month. Use a simple spreadsheet like Excel to track these expenses.
Step 2

Add up your current income. Many individuals get into debt because spending exceeds income. Make a list of any income you receive including monthly paychecks, approximate value of bonuses or contract work, and tally up the total value.

Step 3

Finally, subtract your expenses from your income. If your spending exceeds your income, it's time to make some cuts. This can include downgrading to a less expensive car, securing cheaper housing and monitoring energy usage. Play with the numbers until your income can cover your monthly expenses.
Step 4

Make a plan for paying off debt. Once you have your spending in check, it's time to take inventory of your debt. Make a list of all unsecured debt you have including credit cards, auto loans, bank overdraft fees or anything else. In a spreadsheet, make a column for each account and the total amount owed. Then, review your income and dedicate a reasonable amount to pay each month on each debt.
Step 5

Set up automatic payments from your checking account. The only way to get out of debt is to be consistent with payments. Your Online Banking feature with your financial institution will allow you to set up automatic payments. This will ensure you pay the amount you decide each month without fail.

Skill: Moderate
Tip: Negotiate with your credit card company. Paying high interest rates on debt makes it difficult to payoff. Consider two options: transfer balances to a 0% APR credit card if you can payoff debt within the promotional period or negotiate with your lender for a lower interest rate. If you carry a balance, you are profitable, so they are motivated to retain your business.
Warning:
Carve out a savings plan. It may seem impossible to think about saving when getting out of debt, but racking up debt often occurs when unforeseen emergencies occur--such as car repairs or a vet bill. So even if it's only 20 dollars each month, set up an automatic withdrawal from your checking account to create a nest egg for emergencies so you won't need to use credit cards.

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