There are a lot of talks around getting out of debt on TV and around the blogosphere (think Dave Ramsey and Man vs Debt). And you hear and read those people on the shows in the comments that they feel so wonderful after paying off their debt, or that they feel stuck because they are not making much progress.

In either case, seems like having a debt is a bad thing.

So, why is debt your biggest enemy in personal finance?

Because it limits your options.

If you have large debt sitting in front of you, you’re restricted in terms of your finances because it will stare at you with contempt until you pay it off completely. And if the debt has very high interest such as credit card debt (16% on average), you want to put as much money as possible into paying off the balance. Otherwise, you’d be working from Jan to April for the government, and then from May to July for the debt monsters (credit card companies and banks).

[I talked about credit card debt in more details in my free report, download it here to find out more.]

How to Pay Off Your Debt

If you have several different types of debt, which one should you pay off first? Low balance with high interest, or high balance low interest? Or the one that stares at you the hardest?

Wrong.

Don’t get into bad debt in the first place.

Before you scream at me, know that there’s a HUGE difference between good debt and bad debt. Good debt brings money into your pocket. Bad debt takes money out of your pocket.

For example, leveraging a loan from your local bank to invest in a business venture that has a consistent stream of positive cash flow is a great move towards financial freedom. It’s a good debt.

On the other hand, bad debt haunts you in your dream. It’s staring at you all the time and takes money out of you. You’re probably struggling because of the monthly payments too. Things would have been much better without the bad debt.

Ok now that I’ve set the stage for the best case scenario (zero bad debt), let’s tackle the not-so-good scenario – paying off your debt. There are 3 methods you should use if you have multiple types of debt:

1)      Debt Snowball method

2)      Highest interest method

3)      Zen method



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Choose the one method that fits you the most. I’d prefer method #2 because I’m a rather logical person. Method #3 doesn’t apply to me (luckily) because I don’t have those kinds of energy-sucking loans. I’m sometimes tempted to use method #1 and pay off my debt but the logical side of mine seems to be able to keep me in control for the sake of having more money in my account. Thank God!

So, know yourself, choose the best method and stick to it. Don’t give up until you kill the debt monsters!

One exercise for you today: Which method works best for you? Leave your comments below.

The Personal Finance School Series:

1. Personal Finance School: An Introduction to Effective Personal Finance

2. Cash is King, Net Worth is Queen

3. Why and How You Should Kill the Debt Monsters

4. Personal Finance Automation: The Art of Doing Nothing with Your Money, or Not?

5. How You Can Spend, Save, and Earn Half A Million Dollars

6. Your Money Will Work for You 24/7, If You Are Willing to Work FIRST

7. Why Investing Deserves Another Round of Lesson

8. The Most Important Personal Finance Lesson of All…

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