Many people are now thinking about the new year and are creating some goals.Too many people however quit before they reach their goal. Last week I showed how you can accomplish your goals with an example for savings. This week I want to help you tackle one of the most popular goals people make – paying down or off debt.

What if you’re just able to make your minimum payments each month? What if you’re overwhelmed by having debt in the five figures (or more)? Is there a way you can set up a system for you to pay off your debt faster without resorting to rice and beans for the next decade or so?

How Debt Snowballs Work

Watch your credit cards, you may be losing money.

You may have heard of debt snowballs, but never understoof how they can work for you. Let’s say you have 4 debts right now that are weighing you down:

• Visa: $500 – Minimum Payment is $20/month
• Mastercard: $1,200 - Minimum Payment is $50/month
• Car Loan: $250/ month  ($10,000 balance)
• Student Loan:  $150/month ($20,000 balance)

That’s a total of $470/month you need to have to just pay the bills. You looked at your budget and you managed to cut eating out a bit and save enough for $550/month. Using the debt snowball method you’d pay everything as you normally would except for the Visa. The Visa payments would go from $20/month to $100/month (your regular $20 plus the $80 you dug up by trimming your budget).

Once that Visa bill is paid off in about 5 months, you now take that $100/month and add it to your regular Mastercard payments to bring up to $150/month. After you knocked out, you take that $150/month you used to spend for your credit card bills and you contribute that towards your car loan. Now your $250/month car loan is being whittled down significantly since you’re now paying $400. You keep going until you pay off all your debts.

The great thing you notice is that you don’t have to greatly increase your debt reduction payments, you start with where you’re at and build from there. As you progress in your career, no doubt you’ll see small increases to your take home pay. You can use a portion of this extra money to speed up your debt elimination plan even further.

If you have a hard time building up your debt snow ball, settle for using snowflakes. Snowflakes are smaller sums of money that you throw at the debt as they come in. Think of the extra tip you got from your barista duties or maybe you got a bigger tax refund. As soon as that money is in your account, transfer a chunk of that out for paying down your debts. Don’t let it linger or you’ll lose that opportunity as it is easy to spend those little windfalls.

Making the Debt Snowball Easier – Automate It

Do you want to make the system even easier for yourself? Go ahead schedule your bill payments to handle your debt snowball plan. Once it’s in place, just check on your account monthly to make sure the payments went through and your balances are decreasing. It should take about 20-30 minutes of your time each month. It’s less stress and you’re setting yourself for success because you’re removing barriers that keep many people from paying off their debts.

 Staying Motivated While Paying Off Debt

After you knocked out the smaller debts that you have, it’s time to tackle the bigger ones. Even though you have a system in place that has been proven to work, you now have a new challenge - staying motivated and on course with your debt elimination plan.

It begins with breaking down your balance into smaller goals. Let’s take an example of a $40,000 student loan. How can you stay on track until you’ve paid it off? Here are a few suggestions:

• Keep a chart. Many of us tend to be visual people, so having a visible chart in our place can be empowering. Every time you make a payment go ahead and update your chart.
• Set up small rewards. When you get the debt down to certain levels, like $30,000, $15,000, then $10,000, and so forth you should celebrate.  Throw a party; take a long weekend, do something that you enjoy (that’s frugal) – you deserve it.
• Bump up your budget. It may seem counter-intuitive, but as you decrease your debt, you should adjust your budget to include more wiggle room to fun. For some people having

With time, you can get out of debt without stressing out or becoming overwhelmed.

Psychology of Money

What debts do you currently have? How much debt have you’ve paid off? How do you plan on getting out of it? Curious to see what affects your money making (or losing) decisions? Check other posts in the Money & Psychology series:

• Choosing Friends to Build Your Net Worth
• Decisions, Decisions – Making a Big Purchase
• Is Saving Really About Motivation?
• Ways We Spend Money Without Evening Knowing It (and How to Fix It)
• Barriers That Prevent us From Saving Money
• Dealing with the Stress of Financial Issues
• Getting Your Finances Ready for a New Job
• Are You Hurting Your Own Finances?
• Creating Financial Goals You’ll Actually Accomplish

Photo Credit: quaziefoto

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.