Best Way To Pay Down Debt

First of all, I'd like to point out that I'm not a financial advisor, I'm just a regular person that's in the same boat as you. I'm overextended on credit and living paycheck to paycheck to pay off my debts. I've vowed to myself that 2011 is the year that I make a big dent and progress in getting this debt paid off.

Second of all, the method I'm going to describe will work for any type of debt that you have, credit cards, student loans, mortgages, car loans, you get my point.

The biggest misconception that many of us have been under when it comes to paying down our debt is that we need to take the balance with the highest interest rate first, no matter how high the balance is. Tackling the highest interest rate will save you money, but psychologically, it's not necessarily the best way to go. In order to be successful at paying down our debt we need to see progress, so I'm going to recommend you start with the lowest debt first.

Now that we have the misconceptions out of our way, we get get along with actually starting a plan to get everything paid off. Here are the steps you are going to take. This gets a little wordy, so I'll show an example next to illustrate it.

1. Pick your debt with the lowest balance first and add up anything extra that you have been sending in with your other payments. Your minimum payment and the extra you were sending against all of your other payments is going to be your minimum payment on this debt from now until it's paid off. Of course, you can send more, but don't send less.

2. Hopefully, your first debt won't take long to pay off, if it does, don't give up and keep paying until it's gone. Now what you're going to do is add the minimum payment that you were making on your first debt and add it to the minimum payment on the next lowest debt. This is going to be your payment on the second debt until it's paid off.

3. Keep repeating step 2 until you are debt free. You can even keep working at this until your mortgage is paid off as well. Wouldn't it be nice to have a mortgage burning party before you are retired?

Let's say the above debts are yours. The first thing you would do is start paying $215 ($35 minimum payment plus $180 in extra you were paying on the other debts) per month on your store credit card. After 2.5 months this card would be paid off.

Once the store card is paid off, you would start with your Visa card. Your payment every month on the Visa card will be $415 per month ($215 that you were paying on the store card plus your minimum payment). My guess is you would then have this debt paid off after a year.

After the Visa card you would then start on the car loan and your payment on the car loan would be $715 per month ($415 from the Visa card, plus your minimum payment of $300).

You would then move on to the home equity loan and your payment on this loan would be $1115 per month ($715 from the car loan plus your $400 minimum payment).

Last but not least, you would be able to get started on your mortgage. Your payment on the mortgage would be $2015 per month ($1115 from the home equity loan plus your minimum payment of $900).

The reason this works better than other methods for paying down your debts than other ways I've seen is because you will see results faster. We are all human and if we don't see any results from the efforts we are putting into this then we will give up.

Unlike the banks, I don't want to see you give up.