Money Tips » Get out of Debt Strategy

How would it be to have a killer strategy for getting out of debt in the minimum time? Well here you go. We've studied literally hundreds of ways to get out of debt and this is the one we found least painful and most empowering. NB this system is for non-critical debt i.e it's a pain but you're not yet in danger of losing your home or getting your legs broken, or badly in arrears. If you are go here first.

Most people spend more than they earn or have secreted in savings accounts. It's not rocket science, but if you do this you're debting. Sorry, but the first thing you need to do if you want to get out of debt is spend less than you earn!  So…

1. The first thing you must do is stop debting! Cut up all credit and store cards asap. If you feel like you have to keep one for emergencies (and we don't mean those must-have shoes) , make it difficult to access by giving it to a relative or freezing it in a block of ice or something else radical.

2. List all of the people and places you owe money to. To help you, Download and print off (or copy out) the attached pdf here. Then list all your creditors in the 'Who I Owe' column. Yes that's all of them: student loans, Halifax, that First Direct loan, store cards, T-Mobile, that TV or sofa you put on HP or interest-free credit, even that money borrowed from your Mum/Dad etc. Basically anything that you're going to have to pay back!

3. How much do you owe, right now? In the 'Amount' column write down the exact figure you owe to each of these people and places. You may need to find out the figure – ring them up, open those statements. List the exact amount you owe next to each debt –don't worry we promise you'll feel much better when you know.

a) For credit and store cards, this is the current balance, which you can get from your statement – even better ('cause you may have bought even more goodies since it was mailed out) you can check your exact balance online or by phoning them.
b) For loans you're looking for the 'redemption figure' – this is the amount you'd need to pay if you wanted to pay this debt off in full today, right now. c) For everyone else This may involve talking to them or looking at statements etc, but just get them listed.

Tip: Many people with debts have a stack of unopened bills. A great way to feel you've got some power back is to get a big arch folder and a hole punch and divide the folder, giving one section to each of your debts. Then put on some of your favourite music. Grab the bull by the horns and start opening statements and letters and filing them in the sections. The result is a massive feeling of "I can so do this!".

4. Find out the interest rate for each debt. Ok, whilst you're talking to people finding out how much you owe, make sure that you're really clear on what interest rate they're charging you. Put this in the 'Interest Rate' column. Some lenders give monthly interest rates, others annual. If it's a monthly rate, simply multiply by 12 to get the annual rate.
Then Tart Yourself. No, no, you're not that desperate yet! It just means look at your debts and work out whether you could reduce the interest rate you pay without tying yourself into anything big long term – e.g getting a 0% interest credit card and transferring the balance of your hither interest debts (e.g store cards) to it. That's what they call 'tarting.' Watch out – you may be slapped with a charge for a balance transfer like this so weigh up which option will leave you better off overall.

Right, back to the maths.

Well done, we're now starting to get a really clear picture of how much you owe and to whom. Next:

5. List the current monthly payment for each debt. We need to work out how much you're paying them i.e what you're currently paying in an average month and put this in the 'Current Monthly Payment' column. E.g £230 on your credit card, £70 on your store card etc. You may be surprised at just how much you're already paying. This strategy is just about getting smart about how you pay it off so that you can be debt-free in the minimum amount of time.

6. Now find out what the minimum monthly payment the lender will accept is and put this in the 'Minimum Monthly Payment' column. This may or may not be different to the current payment, but often is. For example you could be paying off £230 a month on your credit card and £70 on your store card, but actually could technically get away with only paying £80 on the credit card and £20 on the store card. Find out. Ask them. This is important. Often credit cards are 3.5% or £5, whichever is greater.

7. Prioritise your repayments. Next you need to decide which debts are the most important to clear first, 'cause we're going to do something crafty. Which ones are hurting you the most? Prioritise first anything that could result in you losing your home or livelihood i.e if you're in arrears and could lose your flat you'll probably want to sort this out first. (NB again, if you're deep in debt doo-doo and are struggling to cope check this out). Other factors to consider are:

• Interest rate (the higher it is, the quicker you wanna pay it off!)
• Whether or not you're allowed to increase your monthly payment (some loans have fixed payments – put these at the bottom of the list to deal with as last priority).
• The emotional weight of the debt e.g if you owe a family member or mate and that debt is putting a strain on your relationship, this could be more urgent to sort out than a credit card with interest. Only you can tell – but debts can cost you way more than just money.

8. Do some quick maths! Go on, you know you can. Try this online calculator (choose the standard one) if you haven't got one handy.
i) Add up all your current monthly payments and put the total figure at the bottom of the column.
ii) Add up all the minimum possible monthly payments and put the total figure at the bottom of that column.
iii) Subtract the total minimum from the total current payments. This will leave you with an amount of money that you are currently paying off in excess of your minimum payments.

E.g if you're paying £230 on your credit card and £70 on your store card per month (£300), but the minimum payment possible is £80 and £20 (£100) , then the difference between the original £300 and the minimum (£100) is…£200. That's £200 big fat shiny pounds you can now redeploy to throw at your debt monsters! This is your Debt Weapon Figure.

9. Next, change all your current payments to the minimum monthly amounts  you can get away with. Yes I know it looks like we're encouraging you to NOT get out of debt – but stay with us, all will become clear. If you can, it's a good idea to put all these minimum payments on direct debit so you never get hit with late fees. The most important thing is to make sure you're paying everything off at least to the minimum level.

10. Find 10%. Now here's the exciting part. We want you to find an extra 10% of your current net income. It might sound hard but most people can actually find 20% without feeling much pain. There are two ways you can do it: either reducing your expenditure i.e what do you currently buy that you could spend less on, or by increasing your income – how can you bring in that little bit extra each month? (It might be as easy as just asking for it!). We've got a whole section on this – check it out in Close The Gap plus also a lively forum discussion on this point at 'Make More Money' and 'Cut Costs.'
If you really don't think it's possible when you've looked at all that, then look at what you CAN manage. Try to find at least 10% of however much you're currently paying on those debts. Remember the more you find, the faster the debts will be eliminated.

11. Now choose your first debt. This is the one you've prioritized highest. Take your 10% Extra Weapon figure and add it to your Debt Weapon figure. This gives you your 'Debt Busting Margin Cannon.'
i) Add your Debt Busting Margin Cannon to the minimum payment for your Number One Priority Biting-You-In-The-Bum Debt and set this amount as a direct debit until it's paid off.
ii) Once Priority Debt is dead in the sand – CELEBRATE! (without breaking the bank – you don't wanna undo all your good work, right? But do treat yourself a bit.)
iii) Move Debt Busting Margin Cannon figure and fire it at your Priority Two debt (i.e second most painful and high-interest) until you've blasted it all away.

Keep this process up until all your debts are paid off. If in the past you've started something like this and then have given up, we've got just the tip for you – check out this.

12. FINALLY: CELEBRATE BIG TIME!!! You are now officially a Zeronaire! Crack open the champagne, sing "Ding-dong the witch is dead!" and brag about your new debt-free Zeronaire status until your mates are all green with envy and want to follow in your enviable and hard-won footsteps.

Other things to consider…
• Put any debts where the monthly payments cannot be charged as last priority – bottom of your list. Once all other debts are paid off, start to put the full amount you would be paying against that debt into a high interest savings account (5% interest rate is good – higher if you can get it!). This would ideally be an account with a one-month notice month for withdrawls (so you lock it in and can't touch it). Keep paying this until there's enough to pay the redemption figure for the debt in full.
• You may slip up. People do. After all we're only human. If you do, don't give up. And to help, set up an instant access savings account. This will act as your 'buffer zone for human error'. Pay a monthly amount into this account towards something you really want e.g a holiday or a new stereo. Any 'slip ups' MUST come out of this buffer zone fund, meaning moments of weakness are potentially costing you something you really, really want – and are thus less likely to happen.