Paying off debts can be incredibly rewarding. You’re getting out of the financial hole and you’re working towards increasing your cash flow. What can be better financially?

Understanding and setting financial goals is important with personal finances. While there are certainly some popular advice out there, you have to decide for yourself what will work. it may be different than what you think.

Prioritizing Where Your Money Goes

Let’s say you’re pumped and  ready to build your net worth as soon as possible. You’re gone through plenty of personal finance sites and saw how debt reduction is the key to getting your finances squared away.  Perhaps you’ve read total Money Makeover by Dave Ramsey and you’ve decided to have that gazelle intensity and you’ll completely pay off everything as fast as possible.

Let’s say for example that you’ve eliminated a few debts and have enjoyed the wins so far. Now you have only have one credit card you owe on, a car loan with a few years left, and your student loan. You may think that just throwing money at all of them would be the best plan. After all, you’ve established that debt reduction is your #1 priority.

Treating your student loans, like your other debts might not be the best financial decision in this case. You have to weigh your options.

Not All Debts are Created Equal

Before you aggressively pay down your student loans, I’d make sure you have the following in place:

• At least 2 months of savings for emergencies: If you have dependents counting on you, you may want to increase to a more conservative level.
• All your higher interest debts paid off: Student loans typically have lower interest rates than credit card debt and some car loans.
• You’re contributing to your retirement fund: Some people may disagree with investing while you’re in five figure debt with student loans, but looking at compound interest, it can pay off.

Instead of just having blind gazelle intensity, I think your money would be better served being channeled to above goals.

Depending on how you feel, you may just contribute the minimum amount to receive your employer’s 401(k) match while you pay down your student loans. Others may just pay the minimum on their student loans and invest the maximum they can.

Deciding on What Works Best for You

My guidelines for prioritizing how my income is dispersed is based on a few things. The gist of it comes down to looking at the long term benefits, both financially and otherwise.

• It can improve monthly cash flow. If I can reduce or eliminate a recurring monthly expense, then I’ll look into paying it off sooner.
• Reducing the debt can give some peace of mind. While having the numbers to back up a goal is wonderful, I know that sometimes it’s not just about the numbers. If we can sleep easier with one less bill, then paying it off sooner can be beneficial.

Everyone has their own criteria on how they want to accomplish their goals. Defining your own guidelines can increase your success rate.

Handling Financial Goals

What are your financial goals? How have you’ve been doing so far?

When I had announced that I bought Green Panda Treehouse, I asked you which kind of topics you wanted me to cover. One of them, was to explore debt repayment strategies. Especially in these rough economic times, paying off your debt becomes the #1 priorities. So I sat down and started thinking about all the ways I know and use to pay off debt. There are also several the experimental debt repayment strategies included. Since I came up with a lot of ideas, I thought of listing all the debt repayment strategies that I know today then follow up with a full detailed post on each of them later on. As you will see, some are very basic while others are quite original.

#1 Flip and Pay Back Your Debts

The flip and pay back your debt strategy only works for a limited time. This is for people with credit card debt with high interest rate. By flipping your debts to a zero percent balance transfer credit card and maintaining your minimum payment, you will still end-up paying off your debt during the zero percent promotion. Unfortunately, these cards offer a low balance transfer rate for only a limited time period.

#2 Consolidate Your Debt

As a banker, I have seen many people lose control of their debt because they were taking too much time to manage the ten thousand statements they received per month instead of managing their budget to repay the debt. Consolidating all your debt into one loan with a fixed rate and determined amortization is a great way to clear your debt, once and for all.

#3 Snowball Debt Repayment Strategy

Snowballing has been one of the most popular debt repayment strategy over the past few years. Combined with a frugal way of living, it has a powerful impact on how fast you can pay off your debt. By concentrating your effort into a single debt until it is gone and use this extra money to pay off the next one, you are growing your monthly debt repayment pace each time you pay off a credit card.

#4 Use The Cutter To Pay Down Your Debts

Take your budget as is, cut down all the extra expenses and start a very frugal way of living. Use all the “unused” money towards your debt. The cutter is a very demanding debt repayment strategy but it is definitely effective!

#5 Track Your Expenses Like a Hunter

This is a slightly different strategy than the cutter since tracking down your expenses is done on a daily basis. Each time you are about to take your wallet out of your pocket, you think twice and each time you don’t spend your money, you take the same amount and apply it on your debt. This is a trick to ensure you always have your debt repayment strategy in mind.

#6 Remodel Your Life to Pay Back Your Debt

Instead of doing a classic budget review and cut where you can, do it differently. The classic way of cutting in your budget is to ask yourself: “is this expense necessary or can I live without this one”. While managing your budget is important, there is only so much you can cut when looking at your expenses this way. So try something new: Instead of starting from your established budget, start from a blank sheet of paper. Write down what you need each month and how you can manage it so it costs less.

#7 Make a Debt Repayment Schedule

This is definitely my favourite way to pay back my debts. I sit down and make a debt repayment schedule. I combine different debt repayment strategies together in order to get maximum results. I setup a plan so I know how much I will be paying every month and when I will become debt free. Having an objective, a date ensures your motivation is at its highest.

Do you know any other debt repayment strategies?

While I will cover these 6 debt repayment strategies in detail in the near future, I’d like to know if there are any other ways to pay down your debts you would like me to cover.

Everyone wants you to do everything it seems: invest in the market, pay down all your debts, save up for your house, make sure your kids have money for college, etc. It can be overwhelming, I know. I had a hard time figuring out where to begin a couple of years ago.

Fortunately I learned that personal finance is not impossible to handle, it just has to be done with plan. My personal preference is one that is easy to follow and can be automated. I wanted to cover a couple of financial goals that you should have down before you move on to bigger and more complicated financial topics.

First Focus: Have One Month’s of Expenses Covered

I really have to stress that I believe this should be the first step of whatever financial plan you create. If you don’t have enough money to cover your bills for one month, you are financially vulnerable.

Next Goal: Pay off High Interest Debt Quickly

Having high interest debt while trying to invest can be a losing proposition. Credit card interest rates can be around 21% (or higher for college credit cards), which is much higher than the historical stock market index return rate. You may want to redirect all your retirement contributions (possible exception – meeting your employer’s match) to your debt reduction fund.

Once you’re out of high interest debt, you can put your money back towards investing for retirement.  Here’s what I did to create a system to pay off my credit cards.

Organized all my bills and found out the balance on all your credit cards.

It was surprising, but I had to know what I needed to do get myself back in the black. Avoiding your bills can hurt your score and set you back even further. Many credit card companies charge fee for being over the limit and being late.  The good news is that you can use budget tools like Quicken or Mint to quickly see your true financial picture.

Developed a debt snowball plan.

I created a spreadsheet and listed all my debts along with their interest rates. I focused on attacking the highest interest rate first and continued my bigger payments in descending order until it was down. I also talked with my credit cards’ customer service representatives to get them to reduce my interest rate for a bit. It allowed me to pay my debts just a little bit faster.

What’s Next?

If you follow Dave Ramsey’s Baby Steps, you’re supposed to build your emergency fund up to 3-6 months worth of expenses. Some may argue that compound interest favors you to invest now as part of your retirement plan.

Why can’t you accomplish both by putting 80% or so towards savings and invest the rest? That way, you’re contributing some serious money for your retirement while still building up a financial cushion. Or you can reverse it and be more aggressive with your emergency fund.

Do What Works

It really boils down as to what works for you to get your finances in control. My only recommendation is having at least a one month cushion tucked away. How about you? What’s your biggest financial goal for 2010?

It’s a bit of a crunch time for us and we’re looking for was ways to cut some fat off our budget for a just a bit of time for this town house purchase. I noticed that these tips also work with building a bigger debt reduction fund, so I decided to focus on the post in that direction. That’s the great thing about learning more about finances: you can take what you need, apply it to your situation and have a big effect.

Cut Unnecessary Expenses

The easiest way is to cut items off your budget that suck up your money without giving you an improvement in quality of life. You can also look at cheaper alternatives for things that you enjoy.

Entertainment: Instead of going to the movie theaters every weekend or eating out several times a week, try something like visiting museums and galleries on free nights, camping or visiting local and national parks, and free concerts downtown.

Gambling and Smoking: While we don’t smoke, we have some relatives that do, so I wanted to mention this as an idea. Eliminating smoking can decrease your bills and improve your health.  You can get rid of a money drain if you’re a gambler.

Credit Cards: Try to not increase your debt while you’re digging out of it. Hide, freeze, or cut up your credit cards.

Telephone: See if there is any way to reduce your telephone expense. Use Skype or another VOIP for your land line. Double check your cell phone plan to make sure you have the right plan.

Cable: Get the limited basic package temporarily to see if you miss the channels. At the very least request to have your cable bill lowered.

Finding a Balance

I mentioned this awhile back, but I’ll include it for new readers:

I just write from my personal perspective. I’m not financial expert and do not claim to be one. If you’re looking at this blog or any other for that matter to get you answers for your personal situation, then you could be applying advice that has no merit with you. It like diagnosing yourself for a disease from the web. It can be bad for your health.

Look at your situation and decide what works best for you. If having cable saves you money compared to going out to dinner and movies for the whole family, look elsewhere to cut. The main idea is to find what doesn’t matter to you and just cut it out or reduce the expense.

I have a relative that has used payday loans to keep them a float sometimes. I was surprised since they had a decent job. After chating a bit with them, I found out that they had a habit of spending more than they earned.  Pretty much many items in the house were on a payment plan, credit card, or rent to own.

If you’re in a similar boat and want to get out of using payday loans, I have some suggestions.

Alternatives to Taking Payday Loans

Find out exactly why you’re short on money. Did an unexpected bill come up or did you forget about your semiannual bills? Was your paycheck shorted? Do you lack a budget or don’t stick to one? Finding the reason can help you avoid being stuck in this situation again.

Re-prioritize your your monthly expenses. Pay your  necessities first. Cut all your luxuries until you can get back on your feet.

• Housing: You need a roof over your head. If you have a mortgage, please focus on paying this bill to avoid foreclosure.
• Food: You need food to survive. Cut out all eating out expenses and stick to grocery foods. Eating sandwiches may not be the popular choice, but it’s the smart one.
• Utilities: Electric, phone, and water are important utilities. Cancel your cable bills and make sure you’re not paying too much for phone service. You can call and see if you can qualify for assistance or a special payment plan.
• Car **If you are way over your head with car payments, try selling it to break even. **

Contact the all companies that you’re in debt with and set up a payment plan. If you’re unable to pay the minimum for your credit cards, call them to set up an affordable plan. Ask them to waive fees and lower your interest rate. Some credit card companies are willingly to cut you a deal on your debt as this recession continues. They would rather get some money than no money. Some utilties like electric will work with you on catching up with bills.

See if you can get a short term loan with Lending Club.You may be surprised to see how reasonably priced the loan can be.

Rebuild Your Finances: Step by Step

Once you’re out of the whole, focus on improving your finances bit by bit. It is possible to get out of the cycle of debt.

Increase your income.

You can only cut your monthly expenses so much, so increasing your income should be a focus. See if you can increase your profile at work and ask for a raise. It may mean getting a second job temporarily. See if you can turn a hobby into side income.

Have a portion of your paycheck transferred to a high interest savings account.

Start small ($25/week) and automate your money to put into savings. You’ll become use to the slightly small paycheck as you start savings.If you can find the money to pay back the payday loan, then consider allocating that money into a small emergency fund for the next time you need help.

The first thing you need to save for is an emergency fund.

This step can help you build financial cushion, especially in turbulent economic times like these. Find an FDIC bank or NCUA credit union that offer high interest rates for savings and watch it grow faster.

Set up free online bill pay with your bank.

Most banks and credit unions offer money and time saving feature. Spend an hour setting this up with your bills, account numbers, due dates, and amounts, and you’ll only need a few minutes a month to keep it up.

Pay down your credit card debt.

Depending on your circumstance you may want to transfer over to a 0% interest card to speed the process up.

• Pay your bills on time. A good credit history can help when looking for a home as ahigher credit score leads to lower interest rates. I had a bad habit of losing paperwork, so I automated all my bills. It saves on late fees and stamps. Many banks have online bill pay as a feature.
• If you can, pay the full amount owed. Credit card companies might call you a “deadbeat“, but at least you’re not tied to them each month. If you can’t, then pay as much as you can. Try a debt snow ball (a technique Dave Ramsey advocates) or evensnowflaking. Find money in your budget to eliminate your debt.
• NEVER, EVER lend your credit card to anyone! Even if it is a trusted family member or family. This account is tied to YOU and you will be held responsible.

Your Take

Those are some things I’ve done to help me get out of credit card debt. What ideas do you have for those trying to dig themelves out of the hole? Any stories or suggestions?

This is a guest post from Jason Holmes is one of the financial writers associated with the Debt Consolidation Care Community.

How can debt counselors help?

Debt counselors are playing a vital role during the credit crunch. They are helping debtors to get out of debt and manage their finances better. If you are facing difficulty in managing your finances, be counseled on debt. It will not just give you a financial edge over others but it will also help you to attain financial liberty in the long run.

Digging out of debt can be hard work.

How can you be counseled on debt?

When you approach a debt counselor, your financial situation is assessed first. If you are in debt and asking for a debt relief option, your counseling will take a different form.

And if you are anticipating that you may fall into debt in the coming months, your counseling will take another form. It is always better to seek help of a professional counselor and still better if the debt counselor is approved by the government.

There are many debt counseling agencies that offer debt suggestions for free. Once they assess your financial situation, they suggest you to enroll for the debt relief option that will help you to pay off debts if you are already in debt or will suggest methods to avert falling into debt if you are anticipating financial trouble in near future.

What does a debt counselor do to make you debt free?

The debt counselor will take note of all your financial details. It includes your monthly income. Your monthly income can include your paycheck, if you are receiving rent from a premise that you have rented out etc. Your expenses are also taken into account. It includes the amount you pay each month for your mortgage, car loan, student loan, credit cards, insurance, your household expenses etc. Your debt-to income ratio is also calculated.

Depending on your financial situation, the debt counselor will suggest you to opt for any one of the debt relief options. It can be debt consolidation, debt settlement (also known as debt negotiation or debt arbitration) or debt management plan. If it is found that you are not eligible for any of the above mentioned program, the debt counselor may ask you to file bankruptcy.

Be prepared to use different tools to climb out of debt.

New federal bankruptcy laws

It may be mentioned here that as per the new federal bankruptcy laws, credit counseling has been made mandatory prior to filing bankruptcy. And you are required to take a “pre- bankruptcy briefing” from debt counselors approved by the federal government. Filing bankruptcy should a be a last resort.

Do It Yourself Debt Settlement Steps

Settling your debts on your own can be possible, too. To do this, skillful negotiation with your creditors/collection agency is necessary. When you are facing trouble in making the minimum payments for your debts, then it is high time that you think about debt settlement. Debt settlement is a method through which you can negotiate with your creditors/collection agencies and reduce your amount of debt by 40%-60%. This article would give you some basic ideas about how you can perform debt settlement on your own in a step by step manner.

Step 1: Calculate your overall debt amount

Step 2: Evaluate the type and length of your debt accounts

Step 3: Get a copy of your most recent credit report from the credit reporting agencies and examine it carefully. Also have a look at sample credit reports offered by the three main credit bureaus.

Step 4: Go across your credit report and find out whether your debt account is still with the creditor or it has been shifted to a collection agency. 

If you carry out debt settlement yourself, then there are a number of advantages. You can save up to 60% of your dues on medical bills, credit cards and other types of unsecured loans. No settlement costs or upfront fees are required. Do it yourself debt settlement procedure is really simple and handy.

Note: I’ve included some do it yourself information on eliminating debt too.

How to get out of debt yourself (Green Panda’s Take)

If you’re looking to reduce your debts by yourself, there are things you need to consider.

1. YOU have to be committed to a plan and stick to it. Have your spouse, friends, family, etc. support you as you reduce your debt
2. Stop using credit cards. Hide them, freeze them, or perform a plasticomy. Use either a physical envelope budgeting method and take out money you need to eat, tolls, etc. If you run out of money, then make a peanut butter and jelly sandwich or bring leftovers for lunch.  If you want a more electronic method, keep track with your spending using a program like Mint.
3. Discover the exact amount of debt you’re in. You can’t come up with a plan until you know what you owe. List all your creditors, the interest rates, and the total amount you owe.
4. Work to see if you can lower your interest rates. If you can’t negotiate a lower interest rate, you may consider choosing a 0% card to transfer your balance. Please remember, balance transfers are a temporary fix and do not address the root problem.
5. Control your spending and write a simple budget. Track what you spend in 2 to 4 weeks. It’s hard to cut back if you don’t what your weak points are, so grab a little notepad and write everything you spend. Use free excel spreadsheets to help you organize your finances.
6. Automate your bills and put aside some money for savings. Protect yourself from yourself and automate your debt payments. Try to pay the minimum on all but one of your debts.  Put the rest of your debt reduction money into either your debt with the highest interest rate or the lowest balance. Highest interest rate method is the financially sound decision and lowest debt is the psychologically empowering decision.
7. Keep working on putting money towards digging out of debt. If you’re looking for money to reduce debt, try cutting unnecessary expenses or get a part time job exclusively for your debt repayment.

Photo Credit: terinea and  jenny downing