A 4-Step Plan to Start Climbing Out of Debt TodayIt can happen days, months, or years after getting your first credit card.

One day you look at the bill, and the minimum payment is almost out of reach. Years of purchases, enumerated monthly on sheets of paper, spell out what seems to be a lifetime of repayments and a small fortune in interest accrual. Maybe using those credit cards got you through college and you never broke the habit. Maybe you've got a sweet tooth for shopping. Or maybe, like so many people in this era, you and your family have fallen on hard times, and when the choice was between seeing your electricity cut off or putting the bill on credit, a little extra debt didn't seem so bad.

However it happened, now you're mired in debt and staring down a mountain of bills just as you're trying to position yourself for retirement. It's a horrifying situation, one you never expected to find yourself in, at least not now, when you should be dreaming about your upcoming golden years.

Take a deep breath. You're not alone. And you can dig out.

Step 1: Know thy enemy.

Before you can do anything about your debt, you've got to know where your finances actually stand. Map out your current financial status, including all those ugly bits you'd just as soon not mention.

First, write out a detailed budget for your regular expenditures. Of course you'll include the usual suspects -- mortgage/rent, utilities, telephone, and groceries. But don't forget to widen your budget to focus on other regular expenses.

Do you subscribe to Netflix (NFLX)? Pay a monthly fee for cable? How much are you spending on entertainment? Dining out? Shopping? What about those once-a-year expenses it's so easy to forget, like insurance, new eyeglasses, car maintenance, or new school wardrobes for the kids? Figuring in all of these numbers will help you determine the true state of your finances.

But you can't stop at a budget and call it a day. You need to map out the exact amount of debt you hold and itemize it based on its source. You've already plugged your cards' minimum payments into your budget. But now, take it a step further and create a new chart listing the balance, interest rate, and minimum payments for each of your debts. Don't forget to include student and auto loans, too!

Once you know what you're dealing with on both sides of the financial coin, you can begin your quest to drive down your debt.

Remember: It's not easy. But it is doable.

Step 2: Snowball like it's December.

Now that you know the cold, hard facts of your financial situation, it's time to get to work. You want to make your money work for you in an efficient manner -- after all, with interest rates bearing down on your accounts, time is of the essence!

One word: snowball.
Now, in order to make good use of the snowball method, you've got to have the funds for your minimum payments well in hand. (If you don't, then scroll on down to Step Three and I'll meet you back up here when you're finished.) The key to snowballing your debt is to pay the minimums each month on every debt, but then take an additional amount and apply it to one predetermined debt -- let's call it Debt A -- until it dwindles down to nothing.

Once Debt A is gone, you take the money you were paying on it (minimum and extra together) and add it to what you were paying on Debt B until that debt is paid off. Lather, rinse, repeat until you're debt-free.

If you're looking for a quick win, select the debt with the lowest balance and work your way up. You'll feel a sense of accomplishment sooner, which will help keep you on track toward your long-term goal.

But even though I'm a fan of the quick payoff, this snowball method isn't my favorite. Find the debt with the biggest interest rate and get to work. It doesn't just pay down your debt; it also saves you all the extra interest you would be paying, and a few extra percentage points can really add up.

So if I had three credit cards that looked like this:
Credit Card
Interest Rate
Card A
Card B
Card C
Then I would arrange my snowball like this:
Credit Card
Interest Rate
Card C
Card A
Card B

This way, no matter what the balances are, I'm paying down Card C quicker so I don't have to sacrifice as much of my hard-earned money to interest alone. It takes diligence to pay in to a card that may not seem like the "quickest win," but it'll save you some cash in the long run.

Step three: Give your cash flow a nudge.

Use your current profession as a jumping-off point for additional work -- if you're a teacher by day, why not be a private tutor by night? Or set your alarm clock for the ripe old time of 3 a.m. and head out for a paper route (they're not just for kids on bicycles anymore).
In short, sometimes the key to debt reduction is to give your cash flow a quick infusion. It's often inconvenient, to be sure, but the payoff can be worth it.

Step 4: Invest in your future.

It may take months or even years, but if you consistently pay down your debt, you will eventually see the light at the end of the tunnel: financial freedom. It's not a bad place to live. But your journey doesn't end there.

Once you're debt-free, your former snowball can help manifest those golden years you've been dreaming about. You can save that money in a savings or money market account. Create an emergency fund that will sustain you through life's tough times (and life does bring with it some unexpected crises) so you won't have to load up your credit cards with expenses you can't afford to pay back. When you've got that under control, keep on saving -- with an eye toward a long-term account to fund your retirement dreams.

If you've got a long-term time horizon, you might want to consider investments that bring a higher return. If you're long on time but short on expertise, an index fund or ETF, such as the Vanguard Total Stock Market Index (VTSMX) or SPDR S&P 500 (SPY), may be a sensible choice. With one investment, you'll access companies spanning the breadth of the S&P 500, including ExxonMobil (XOM), General Electric (GE), and Microsoft (MSFT).

The path from the red to the black side of the ledger can be long, but take heart. With some deft financial moves and a basket of patience, you can climb back out -- and with money in your pockets, to boot.

Hope Nelson-Pope is online coordinating editor at The Motley Fool. She owns shares of Microsoft but none of the other companies mentioned in this article. The Motley Fool owns shares of Microsoft and has sold short shares of SPDR S&P 500. Motley Fool newsletter services have recommended buying shares of Netflix and Microsoft, as well as creating a bull call spread position in Microsoft.

Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

How much house can I afford

Home buying 101, evaluating one of your most important financial decisions.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Great idea. I've started taking action a few weeks ago to do something similar. I uses a site called buckledownfinance.com to get an idea of my budget but didn't really do the snowball effect based on interest rate. I decided to take the path of highest balance first. Ey - Either way works in my opinion. Just trying to get out of debt is a tough process in itself.

August 08 2012 at 10:42 AM Report abuse rate up rate down Reply
Ivan Green

I just came across this article and was surprised that the only comments had nothing to do with the article. That could explain why so many people are in debt. It is easy to play the blame game.

This article actually has a lot of good information. If people would take this information and apply it to their lives, they would be able to live debt free. We work with people everyday that are having success following our plans. I hope that this article and others like it find their way to the people that need it most.

May 29 2012 at 10:10 AM Report abuse +1 rate up rate down Reply

Join me and others to reduce the price of gasoline to $2.00 a gallon before the end of the year without government's help. It is going to work. This is not a span it is real

March 29 2012 at 5:48 PM Report abuse rate up rate down Reply

Join me

March 29 2012 at 5:47 PM Report abuse rate up rate down Reply
Sky Fairlane

Regarding unpaid debts, a petition has been started on moveon.org to prevent the return of debtor’s prison in the USA. Once enough signatures are obtained, it will go to the US Congress and President Obama.

To sign the petition go to:


February 10 2012 at 9:52 PM Report abuse rate up rate down Reply

Take out C.C. Cards and Personal Loans out from the system and problem is solved...simple as that...long time ago in this country all this stuff ''Credit'' for everything DON'T EXIST and in that time this country works just fine...so I don't see any reason why not work agin just fine if we take out this ''rip-off'' stuff completely out of the system...

November 14 2011 at 8:40 PM Report abuse rate up rate down Reply

Here is a plan, shred the plastic with the shreader you bought with the credit card. Pay cash for everything, hide leftover cash out of sight of the government and go BK to screw the banks.

November 12 2011 at 1:19 PM Report abuse +1 rate up rate down Reply
Frank Ryans

If you have sufficient available equity in your home, refinancing may allow you to consolidate higher interest rate debt or obtain funds to make home improvements. It took me only 3 secs to find my rates on 123 Refinance site

November 12 2011 at 4:11 AM Report abuse rate up rate down Reply

congress should take heed.
THEY are the problem.

November 11 2011 at 10:24 PM Report abuse +2 rate up rate down Reply

5 steps
Fire HillBilly Obama
and the rest of the Spendocrats

November 11 2011 at 6:56 PM Report abuse +2 rate up rate down Reply
1 reply to billyjoeobama's comment


November 11 2011 at 10:24 PM Report abuse rate up rate down Reply