If you are struggling to manage your debt – the good news is that you can make a plan to pay down everything you owe in a few basic steps. 

The first step is to review your debt.  Make sure you understand exactly what you owe.

Then, after you a full list of what you owe make a determination about which is good and bad debt.  Good debt is generally the result of investments in yourself such as a small business loan and college loan.  Bad debt can include credit card debt and other types of debt that have high interest rates.

When you are reviewing your debt make sure you understand not only the amount you owe for each debt but also the interest rate that it carries.  This will be important later on to help you find and execute the right strategy for paying down your debt.

The next step is to review your budget.  Figure out the maximum amount of money you can allocate to paying down your debt.  There are lots of tools that you can use to make a budget, including applications like Mint and You Need a Budget (YNAB). 

Now, you’re ready to start paying down your debt.  But where to start?  You should choose between two strategies.

  1. Avalanche method.  Using this method you pay down debts in order of interest rate.  By paying down debts that carry the highest interest rate first you are saving money on interest and will pay less money overall.  It is recommended to choose this method if you have large amounts of high interest debt, such as credit card debt.
  2. Snowball method – pay down debts in order of balance size, starting from the smallest and working your way to the biggest. By starting with paying off the smallest balance first you gain motivation to continue paying off debts. The downside here is that if you have larger loans with higher interest rates you will be more overall if you decide not to pay them off but the psychological benefits are very high.

Overall – your goal should be to get out of debt.  Find a way that works to you and stick to it.  If a method is not working – try another!  If you can get out of debt you can free up cash flow which instantly provides you with more financial freedom.  With this you can go on vacation, invest, or enjoy a little more entertainment in your life.

Getting out debt may seem overwhelming but once you are in control and have a plan it is only a matter of time until it is achieved.