Eliminate Debt - Choose Your Debt Elimination Strategy and Become Debt Free

By Lyn Bell

You have decided you want to eliminate debt but how do you go about it and what does it mean for you? What must you do, and where do you start? Debt elimination means owing no money whatsoever -- the mortgage balance is showing a zero, there are no bank or finance loans and no credit card balances. You are in fact, debt free.

We hear a lot about eliminating debt and most of us know that it makes sense to be debt free. We also hear about the strategies to eliminate debt but some of these seem to contradict one another. What are the strategies and which will be best?

When we talk about eliminating debt we often think of credit card debt because there is no term and the only end to the debt is running out of the allowed limit. But there are other debts that have high interest and high payment schedules which will set you back financially.

What to do and where to start. The following strategies are common to all good advice:

o Stop getting into more debt. In other words do not incur new debt.
o It also means eliminating unnecessary purchases especially while getting your debt under control.
o Cut up your credit cards.
o Live on cash and not plastic. This way you will get in touch with the actual money you have available to spend.
o Pay more than the minimum repayment. Paying the minimum usually covers only the interest and barely covers any of the actual debt.
o Make a personal commitment to control your spending and do a budget. Seeing your actual spending habits in your own writing will give you a clear and concise picture of where your money is going.
o Reduce your expenses -- you will have more to pay towards your debt.
o Put every cent you can towards paying off your credit card and other debts.
o Having a strategy that works for you -- decide which strategy is best in your circumstances. Planning is the key.
o Increase your income where possible -- start a home based business, take in a border, use your hobby to generate cash.

What are the conflicting views on eliminating your debt? Let's take a look at the pros and cons of each.

1. Paying off the smallest balance regardless of the interest rate. It may be the lowest interest rate of all your debt but this strategy is more of a psychological one. FOR: The reasoning is that you will be more motivated to stay on your debt free path as you get rid of one credit card debt after another and you will do it faster. AGAINST: If this is your way of thinking it may suit you best but it does not make sense money wise to pay the lowest interest as you will be paying more in interest towards the higher interest debt. Usually this strategy means paying the minimum on other debt but if you decide on this course of action do try to make a payment above the minimum required on your other credit card debts -- however small.
2. Sorting your debts by interest rate and repaying the highest interest debt first. FOR: The highest interest rate will be clocking up more debt as the interest calculates on the daily balance. It makes sense to get rid of this debt first. AGAINST: You may find you have a lot of different smaller payments to make and budgeting may be more difficult.
3. Combine the first two strategies. Sometimes you will repay the debt with the highest payment, sometimes the highest interest rate and sometimes the highest balance.
a. The biggest repayment -- FOR: By choosing to repay the highest required payment first you will have more to pay towards the remaining debts once it is cleared. AGAINST: If the debt is large and long term this will not work best as you may be repaying debt for a long time to the disadvantage of other debt and of your budget. It can work if there is a short period left to clear the debt.
b. If the smallest balance has the highest interest rate but can be cleared quickly because the balance is small then choosing this option will give you that psychological boost.
c. If you have two debts that have a similar balance but one is slightly bigger than the other consider the interest rate on each. In this case choose the debt with the highest interest charges to repay first.

In order to eliminate debt you will find it is all about spending less, increasing your income and having a workable budget. Debt elimination needs careful thought and a lot of planning.

Lyn invites you to receive a free report on Ways to Cut Your Grocery Bill and help with your budget.

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