How to Get Out of Debt in Five Steps

To get yourself out of debt you need a plan, and this article will help you create that plan. It won't always be easy, or very fun, but the reward pays you back ten-fold with less stress, and more discretionary income.

Note: This article assumes you are willing and able to go through the process of paying off your debt, no longer how long it takes. If you're simply not capable of paying it off, or you feel you might be a victim of predatory lending practices, you may want to consider a more aggressive approach such as debt settlement or even litigation. The best program I've seen for walking you through the steps in these options is Scott Stephen's Ultimate Debt Guide. I've also read good things about John Commuta's Debt to Wealth program.

It's been broken into 5 easy steps, with the last being an optional "burst" you can give to your endeavor to help quicken the process.

Step One: Account for Everything

The very first thing you need to do is sit down and go through all of your bills. Make sure you have enough time (hours) to do this, don't become distracted. This is important, so treat it that way.

Layout all of your expenses, everything you spend money on, along with how much you spend on each item every month. If some bills/expenses are not paid monthly, divide them appropriately to come up with a monthly amount. We aren't talking about chopping away at them yet, this is the task to get everything together to better understand where exactly your money is being spent.

Things to make sure you've accounted for include: television, Internet, phone (cell and land-line), electricity, gasoline, food, entertainment (night at the movies, dinners out, etc.), housing (mortgage or rent), car payments and expenses (repairs), and credit card payments. There's likely some things you pay for that I haven't listed, don't leave them out!

You can even break out your grocery bill into two "piles", one being necessities (toilet paper, bread, etc.), the other for non-essentials (beer, junk food, etc.).

You should also have your income figures after all deductions so you know exactly how much money is coming in.

Lastly, account for your behavior! If you are not "accountable" to yourself, you'll fail. You need to be dedicated to changing the behavior which got you into trouble in the first place.

Step Two: Calculate

Now calculate four figures (all in monthly amounts): total expenses, total income, total debt, and what I like to call "bad debt", which is debt from things like credit cards and personal loans (not your mortgage). Your debt payments are a part of your expenses, but your expenses include more than your debt.

Remember, the goal here is to get out of debt, so we want to know exactly what this debt amount is, and where it lies.

There's a distinction between credit card debt, where you are not building any equity, and your mortgage, where you are. We are primarily concerned with that debt (credit cards, personal loans) which will not be repaid down the road like owning a house can.

Determine the time period, realistically, that you would like to be free from this "bad debt", and how much money you need to commit each month to make that happen. Having a road map like this is beneficial because you will see your progress each month, and see yourself getting closure to the "finish line". You can even create a special calendar to help you visualize your progress.

Step Three: Decisions

Assuming the money you need to pay off your debt within your allotted time isn't currently available (otherwise you wouldn't be reading this), you need to make some decisions concerning your expenses to make it available.

How much do you need to cut back to achieve your goal? The answer to this will determine how much sacrificing you need to do.

Consider each of your expenses. Some will be easier to cut than others. For example, do you need to eat out once a week? Do you need both a cell phone and a land line? Can you do without the movie channels from your TV provider?

Don't just pass over items, really weigh each expense over the stress and limits you feel due to your debt. Some people say "I can't do without my television", but when they are presented with the choice of TV or debt-free life, they choice to do without for a period of time.

And it can be temporary. When you are free of your monthly loan and credit card payments, your discretionary income will increase, allowing for the luxurious you previously gave up (just don't overdo it).

If a large amount of money is going to credit card interest, look for introductory zero percent offers to move your balance to. These typically last for 6 months, so always be looking for them, and keep moving your balance so the money you send to the credit card company is actually going to your principle instead of interest.

Step Four: Implement & Stick To It

The goal is worth the effort. Don't make the mistake of creating a plan to get yourself in a better financial situation, only to not follow through.

Step Five: Give Your Plan an Extra Push

Do you have things around the house you don't use? Have a garage sale! Hundreds of dollars can be made at a yard sale (here's some tips).

A lot of women have jewelry they never wear, consider selling it. Guys, what about those tools or electronics?

Minimize your "stuff", sell what you don't actually use. Downgrade your car (if you have a large payment) to a smaller model (more fuel efficient and cheaper), or even a used one.

You may be surprised how much you have lying around that you won't miss, and how big a dent you can place in your debt by selling it.

When you create a plan and stick to it I know you can succeed. It's just a matter of actually doing it. Imagine the fun you can have and places you can go when you aren't throwing hundreds, or thousands, of dollars a month to interest and credit card payments! Focus on the good things to come for motivation!

Note: I'm not a financial advisor. The above are steps that have worked for me. If you are in need of help, seek a professional financial advisor.