How to get out of debt?

by Russell Clarke & Burton E. Banks

You plug away at your debt, and saving and investing ends up on the back burner. Sound familiar? If debt is keeping you from having what you really want in life, consider these five steps to meet your financial obligations while making progress toward your goals:

Step 1: Understand where your money is going. If you find it difficult to account for the money you've spent, it may pay to track your spending; every day, whenever you reach into your pocket to pay for something -- anything -- or if you use your charge card or write a check, keep a running tally in a little log. What and how you spend may surprise you once you see it in black and white. By doing this, you'll easily determine which expenses are fixed and which are discretionary. You may discover you can save hundreds of dollars a month just by eating fewer restaurant meals, and by taking public transportation to work instead of driving or taking a taxi. If you have a computer, consider using financial software to help track your spending and to break your spending down into categories.

Once you understand how you spend your money, you can decide which discretionary expenses to reduce or eliminate from your budget.

Step 2: Set realistic goals. It is easy to become discouraged by your lack of progress if you don't set realistic debt-elimination goals. Chances are your debt didn't accumulate overnight, so it may take some time to pay it off. Once you have a clear picture of your financial situation, set timelines for paying down your obligations and getting your savings plan on track. Be sure to give yourself credit when you reach your intermediate goals to help maintain your motivation to continue.

Step 3: Avoid new debt. Financial security often requires patience. Rather than adding to your debt to make a purchase, determine what you want to buy and how much it costs. Then take the money you'd use for the payments and save it for your delayed purchase. In the long run, you may save a surprising amount of money in interest by postponing your purchases until you have the cash. Also, consider using a charge card rather than a credit card. By paying off your balance each month rather than adding to your debt, you'll save on interest payments.

Step 4: Eliminate high-interest-rate debt first. You could realize considerable savings over time by prioritizing your debt and paying off loans with the highest interest rates first.

If you've ever been lured by low interest rate grace period offers, be sure to read the fine print. Many offers for free interest over predetermined periods of time have severe penalties if the balance isn't paid in full during that time frame -- in fact, if you miss your payoff deadline, you might find a high-interest payment based on the entire amount tacked on to your remaining balance.

If you are a home owner and your debt is substantial, you may be able to replace a number of smaller payments with a loan against the equity in your home. By consolidating debt with a home equity loan or line of credit, you could end up with a lower payment, and -- as an added bonus -- your new payment may even be deductible on federal income taxes.

Step 5: Establish a regular investment plan. If you think you don't have the resources to get started with an investment plan, don't worry. Taking small steps toward your savings goals can still allow you to reach your debt reduction objectives. Consider using a direct-deposit option to take money directly out of your paycheck into a cash account for debt reduction and emergencies or systematic investments in taxable mutual fund accounts. Such a plan doesn't assure a profit or protect against loss in declining markets, but over time, you won't miss the money, and you'll enjoy watching the account grow at a higher rate than most checking accounts.

You should also consider contributing to an employer-sponsored retirement plan like a 401(k) or a 403(b). Such a plan allows you to make regular contributions that add up significantly over time. What's more, your retirement plan earnings are tax-deferred and some employers will match your contributions -- giving you an instant return on your money.

Looking for help?

If debt reduction and financial management are high priorities for you, a financial advisor can be a valuable resource. He or she can help you create a financial plan that assesses your entire financial situation, helps you identify your short- and long-term goals and recommends a course of action to help reach them.

You may also want to consult with the National Foundation for Credit Counseling, a national nonprofit network designed to help people dealing with stressful financial situations. For more information about the organization call 1-800-388-2227 or visit their Web site at www.nfcc.org. Or look into myvesta.org (formerly Debt Counselors of America) -- the excellent Web site offers dozens of useful articles and suggestions.