A Step-by-Step Guide to Paying Off Debt

Getting out of debt sounds great, but a lot of people find it hard to do. The overall process is pretty simple: Rein in your spending, and throw all the money you can at one debt at a time until each is paid off.

Unfortunately, “simple” isn’t the same as easy. Some of the steps in this process are huge and could take months. You have to truly want to get this weight off your shoulders—but when you see the progress you can make in even one month, you’ll realize the trouble is worth it.

Here’s the ‘Paying off Debt’ process, one step at a time:

1. Stop spending.

There’s no way around this. If you want to be debt-free, you have to stop getting further into debt. If your monthly bills are higher than your income, you might have no choice—though you can still try to spend less on the more flexible things like clothing.

Take the Next Step
    Take your credit cards out of your wallet and put them somewhere safe.
    Erase any credit card info saved on your favorite shopping websites.

2. Find out where you stand.

It might take a while, and it will probably be painful—but it could also be one of the best gifts you ever give yourself. Make a list of all your debts: who you owe, the balance, the interest rate, and the monthly payment. Also make note of your monthly take-home pay, plus any extra cash that floats your way on a regular basis.

Take the Next Step
    Gather your statements from the past few months, if you have them.
    Start your debts list, and note whether any are late, about to go to collections, or already in          collections.
    Take a breather. This is tough, emotional work and if you need a time-out, you should take          it. And don’t worry; this will get easier.

3. Figure out how much extra you can pay each month.

Take a close look at your credit card and bank statements (or your tracking sheet, if you've been keeping one). Label each transaction as a bill (which you have to pay), a necessity (things you need but could spend less on, like groceries), or optional spending (things you don’t need and can’t afford right now, like movie tickets).

Add your costs for the first two categories together. The difference between that and your monthly take-home pay is what you can use to pay down your debts. (This number will change over time, so don’t be discouraged if it’s small or even below zero right now.)

Take the Next Step
    Learn how to track your spending.

4. Try to get your interest rates lowered.

If credit card debt is what’s weighing you down (as it does so many Americans), just a few minutes of work on your part could give you a lower interest rate, which will mean lower monthly payments. In many cases, you just need to call the number on the back of the card and ask to have your rate lowered. If you aren’t eligible for a rate reduction, you might consider transferring all or part of your balance to a card with lower interest. (Pay close attention to the balance transfer fees; they could wipe out any savings you get from the lower interest rate.)

Getting your interest rate lowered on a mortgage, car loan, or other loan is a different story, unfortunately. You would need to refinance the loan, which can have costs of its own and be difficult if your credit score has taken a hit lately.

Take the Next Step
    Call each credit card company you owe and ask for a lower interest rate.
    Reward yourself for the steps you’ve taken so far (preferably without spending money).

5. Begin gathering extra dollars to put toward your payments.

You actually started doing this back in Step 3. Take it further by taking a closer look at your spending. What can you cut out or reduce? Be creative!

Have you considered ways you might bring in extra money? If you haven’t asked for a raise recently, now could be a good time. You could also volunteer for overtime, pick up a second job, or put a hobby like woodworking or sewing to work for you. The possibilities are endless, and a little effort could go a long way.

Take the Next Step
    Think of three ways to bring in extra income—even a small amount.
    Choose four simple ways to lower your spending.

6. Pay those extra dollars toward one debt until it's gone.

Each month you’ll pay all your minimum payments like usual. All the extra money you’ve saved up over the month will go toward your worst debt—the one with the highest interest rate.

Take the Next Step
    Look over your list of debts and decide which to pay off first.
    Set up a way to set aside the extra dollars you’re saving so they don’t get spent. (A          high-yield savings account works for a lot of people.)

7. Celebrate your first debt pay-off and move on to the next.

Congratulations! As the burden starts to lift, take the time to reward yourself and your family for the work you’ve done. Chances are you’ll be eager to move on to the next debt. Remember the minimum payment you used to send to the debt you just paid off? Add that to your extra debt payment every month and your pay-off will start to pick up speed.

Take the Next Step
    Choose the next debt to pay off.
    Have the minimum payment amount from your first          debt automatically transferred into your savings          account so it doesn’t get spent by accident.

8. Keep doing this until you're debt free.

Every time you pay off a debt, add the old minimum payment amount to the extra monthly debt payment you put together in Step 6. Once you knock out a couple of these debts, you could be paying hundreds extra each month without noticing any change in your daily spending habits.

As you get close to your goal, think about how you’ll use this big chunk of money once you no longer have a debt to use it on.

Take the Next Step
    Take a look back at the new habits you’ve picked up during this process. How will you keep          them going when you’re debt-free?
    Choose the account you’ll transfer your money to each month once you’re debt free. IRAs,          mutual funds, and savings accounts are all great ideas. IRAs, mutual funds, and savings          accounts are all great ideas.

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