Mission Possible: Get Out of Debt

After all the holiday excess, most of us decide to lose some weight or to start exercising more, but this year the most popular resolution seems to be to get out of debt.

For many of us, last year was not the best financially, actually for some it might have been the worst financial year in their personal history. We had negative equity, downsizing and a lot of companies folding.

Entering 2010, people are starting the decade with the dream of financial security; paying off all those unpleasant credit cards, student loans and having an emergency fund.  Bravo, let’s go!

First of all how to get out of debt, there are a few schools of thought on this – Dave Ramsey, the American “Live Debt Free” guru advocates the Debt Snowball.  The Debt Snowball is where you list your debts smallest to largest, regardless of interest rates, then pay them off in that order.  The idea is that you will get a sense of accomplishment with each debt you pay off. If you tune into Dave’s podcast, radio show or TV show, you can see the evidence that this works for many.

But what if your largest debt has a the highest interest rate? Dave would say still pay your smallest debt first but mathematically that would not work for a lot of people.  Some might feel ill just looking at the interest that comes in on the statement every month and feel that the interest they are paying is just leading to more days of rice and beans.

I have found another service called See Beyond 20/20 that for a fee will organize the order in which to pay off your debt the quickest and cheapest way.  Yes there is a fee involved, it costs $145 per year which works out to $12.08 (£7.55) per month, not a great deal of money if you are serious about getting out of debt. I think this is a great service if you are not mathematically inclined.  Every month they send you a plan of how much to pay to whom, so it acts as a reminder too.  Their goal is to analyze the most efficient way to pay off your debts in the quickest way possible.

The other way I wanted to mention is the Debt Tsunami that was designed by Baker at ManvsDebt. This method is based on the emotional interest of your debts. This is extremely effective if you have borrowed funds from friends or relatives and are feeling the impact of the debt on your relationships.

There are several ways to approach getting out of debt and I hope I have outlined the best ones.  If you have another method that has worked for you please drop me a comment.