Resolutions 2012: 4 Steps to Destroy Debt

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We’ve been covering financial New Year’s resolutions for more than a week, but today we tackle the biggie: destroying debt.

62 percent of people in the National Foundation for Credit Counseling’s recent survey want to work on paying off obligations this year, which is no surprise – it was the most popular goal last year too. But as with the never-ending resolution of losing weight, many people who lack planning and discipline will struggle to follow through.

But don’t get discouraged: 2012 can be the year you succeed. In the following video, Money Talks News founder Stacy Johnson explains the most successful method for eliminating debt – no fad diet required. Check it out, and then read on for details.

Sounds pretty simple, but you have to put it into practice. Let’s recap the process and talk more about the snowball method.

1. Collect your bills.

Gather up all the records of your unpaid debts so you can take a good look at what you owe and decide where to start. Make sure you include your mortgage, car loan, student loans, credit cards, and any other debts you have, including personal debts. You should have current balances and rates, either online or on paper, but you can also find most of your debts on your credit report, which you can get free once a year from each of the three major credit reporting agencies – just head over to

2. Choose a target.

Now it’s time to choose a debt to destroy. There are two ways to go about this. Which works best for you will be determined by your personality and approach.

The first, which Stacy advocates in his book Life or Debt, is to prioritize the debts with the smallest balance, or fewest payments left to make. Why? Because you can pay them off faster and see the strides you’re making. Fewer due dates to track and fewer payments to send out leads to peace of mind, a sense of accomplishment, and the motivation to keep shrinking balances. If you’ve tried and failed to bail yourself out in the past, this method might provide the extra push you need.

The other approach is to focus on the debt with the highest interest rate, because that’s the one costing you the most money over the long-term. If you’re the kind of person to get worked up about getting worked over by interest charges, this may be a more motivational method – and it’s certainly the one that saves the most money. Plugging your numbers into this debt calculator can help you decide between the two methods: You can find out the difference in total cost by toggling between “balance order” and “interest order.”

3. Divide and destroy.

Regardless of the method you choose, the way to maximize your damage to debt is to snowball your payments.

In other words, you’ll devote every dime you can lay your hands on to your target debt until it’s dust, while making only minimum payments on the rest. When you polish off the first one, take those extra resources and old payments and apply that cash to the next debt down the chain; repeat this strategy with every debt you have. As you progress, debt payments from retired debts, along with whatever extra you can come up with, will snowball into more financial firepower to face the big ones.

Do this until you’ve paid off every debt you care to destroy. Then take those old debt payments and convert them into a money machine by investing them instead.

4. Find the money.

Note the paragraph above refers to devoting “every dime you can lay your hands on” to your target debt. This is a critical step. In Stacy’s book, he recommends you try to devote 10 percent of your gross income to debt destruction – not easy to do if you’re living paycheck to paycheck.

Finding the money to swell your debt payments is the hardest part of getting out of debt. But it’s critical. That’s why tracking your spending with a budget is so important: It allows you to analyze and plan your spending so you can find your “debt destroyer.” But it’s also important to find as much as you can without making sacrifices in your quality of life. You may not have to scrimp as much as you think – just do some research on our site and others and get creative. Here’s a list of our most popular saving posts that might give you ideas:

These stories can help you establish a spending plan and get in the habit of hunting for savings on a regular basis. When saving becomes second nature, getting out of debt – and staying that way – becomes a whole lot easier.

And if you think this process doesn’t work, check out the recent reader post How I Wiped Out $37,000 of Debt In One Year, or one from last year, Reader Shrinks Credit Card Debt.

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