How to Get Rid of Debt Faster

Understanding debt can hep you get rid of it faster.

Controlling expenses is an important aspect of managing personal finances, and debt is usually the most critical expense you must control. There are many forms of debt; not all debt is bad, and some debt is worth incurring. However, bad debt can destroy financial plans. Therefore, learning to make smarter debt decisions is a vital step toward a better financial future. Understanding the relationship between the cost of financing a debt and its long-term value is the first step in understanding how to get rid of debt faster.

Things You'll Need

• Pen
• Paper
• Calculator

Instructions

1. List any forms of debt you incur on a monthly basis, such as credit card payments, gas and store charge accounts, and any other unpaid loan balance (including mortgage, auto and student loans).

2. Write down the total charges owed on each account, as well as the minimum payment due and the interest rate. Add up the total due for the month and divide it by your monthly income to get your debt to income ratio. If your debt to income ratio is higher than 20 percent, this is a sign that your debt is becoming a problem. If it's approaching 30 percent, it's unlikely that you will qualify for any more loans.

3. After making essential payments like mortgage, auto and education loans, prioritize the remainder of your consumer debt. Start with the bill that has the highest interest rate and the lowest total due. Calculate the maximum you can afford to pay while maintaining minimum payments on the other forms of debt.

4. Once you have paid off the first bill, proceed to the bill with the next highest interest rate and lowest total due. If two bills have similar totals due, always prioritize the bill with the higher interest rate.

5. Periodically check your debt to income ratio, based on your new debt total, to stay motivated. Make it a goal to lower your ratio to 15 percent (or lower, depending on your starting point). Continue setting such goals until you reach an acceptable ratio of 10 percent or lower.

Tips & Warnings

• If you don't already have one, it's a good idea to keep a monthly budget of other expenses. This will help you make necessary cutbacks, which will free up more money to put toward paying down your debt.

References

• "Personal Finance At Your Fingertips"; Ken Little; 2007