Debt Elimination 101: List your debts

So you thought the idea of tracking your spending was painful? Wait until you realize that another important step in eliminating your debt is facing your demons head on. That’s right: You have to sit down with all of your debts and you have to write down each and every outstanding debt…to the penny.

Impossible to discover the validity of this, but I bet that too many people who are serious about eliminating their credit card and consumer debts abandon the process because they’re overwhelmed at this prospect. It’s true, facing the extent of your debt can be a daunting idea.

But you’ll never climb out from under the oppressive weight if you don’t do it.

MAKE A LIST

Again, the Gurus all agree that you need to compile an exhaustive list of all your debts if you are serious about eliminating debt (although, as you’ll see later, they arrive at different ways to eliminate it).

So…write it down! Write down you car loan, a decade old loan to your parents, your credit card debts, school loans. Everything is written down. To the penny.

You may feel depressed or overwhelmed once you’ve completed this step. But remember, if you read Dante’s Inferno in high school, you remember that you have to climb down into the pits of Hell before you can reach the heights of Heaven.

IT’S WRITTEN DOWN. NOW WHAT?

This is where the Gurus disagree. Many financial planners will want you to not only write down how much debt you owe, but the interest rate your being charged on the debt. According to his plan, you will order the debt from the most expensive to the least expensive amounts. Maintaining minimum payments, you will work on paying off the most expensive debts first before concentrating on the cheaper debts. (Dave Bach and Jean Chatzky support a version of this form of debt elimination.)

Dave Ramsey, on the other hand, takes a more “touchy feely” approach to debt reduction. He calls it the Debt Snowball. Dave suggests that you order your debt from the smallest amounts to the largest amounts. Again, you will make the minimum monthly payments on all your debts while you are working on your snowball. The trick with Ramsey’s approach is that you make you actually create a snowball effect (i.e. all the money that you were throwing at a debt you just eliminated, now gets thrown to the next amount that needs to be eliminated and so on and so on and so on until, theoretically, you can pay off your last debts with large sums of money).

STAY FOCUSED

Above all, it is important to stay focused. Reducing your debt takes focus. Debt elimination takes years. There will be bumps in the road on your path to financial freedom. Instead of abandoning your goals when a setback occurs, it is crucial that you take a deep breath, refocus your efforts and work through them. Setbacks will occur. Maintaining your focus on eliminating debt will guarantee that all your hard work will pay off.

While there are many different ways to pay off your debts, the fact remains that you have to know where you are financially. Only then can you develop a successful plan of action.