So we had some fun yesterday with other people’s money.

But today we are back to our own accounts and looking at the consumer debt we have run up over the years. A couple of credit cards here, a personal loan there, oh! and a nasty little storecard there lurking about hanging it’s 27.5% APR head in shame.

Just how do you go about paying it off?

There are four rules for paying off debt. Mary Hunt, in her excellent book ‘Debt Proof Living’ talks about a “Rapid Debt–Repayment Plan”.

1. No more new debt.
2. Pay the same amount every month, off each debt, until that debt is cleared.
3. Line up your debts according to size, putting the one with the shortest pay–off time at the top and the one with the longest term at the bottom. (Or use the highest interest rate/pay off first method).
4. As one debt is paid, take that payment and re–direct it to the regular payment of the next debt in line.

There is an example in Mary’s book of the Green family and it compares different scenarios. They stick to Rule 1 (no more new debt) in the first but not the other rules, and it takes them 396 months or 33 years to pay off all their debts. They pay back £26k in debt but pay £18k in interest. A total of £44k.

In scenario 2, they obey Rule 1 and Rule 2 (pay off set amount) but they don’t reallocate the amounts freed up when debts are paid, they spend the extra money. They pay their debts off in 73 months or 6 years and 1 month, saving £10k in interest.

In scenario 3, they obey all four rules. They pay all debts off in just 52 months or just over 4 years, and save themselves just over £11k in interest.

There you go, easy isn’t it? Mary Hunt even has a rapid debt repayment calculator on her website www.debtproofliving.com so get the figures you need and work out how many repayments it will take to be free.

Easy, no? So why not? Why is it so hard for some people to do it, even when they know what they should be doing? Because life gets in the way, life throws curve balls, life sneaks up with exocet missiles. This is why your rapid debt repayment plan has to run alongside your Catastrophe, Contingency and Odds & Sods Funds. And all of that has to run alongside living in Financial Integrity.

Debt is the symptom of the problem, not the source. There is always a deeper reason why you are in debt, or have trouble clearing debt. Perhaps you are medicating stress with shopping, perhaps your partner is not supporting you in your striving for financial integrity, perhaps you don’t have a compelling enough vision of what life would be like if you didn’t have to service those debts.

Stop and think for a moment. If debt is the symptom then what is the source? Only by identifying that source will you come to see the solution. It may not be pretty.

ACTION STEP

If debt is the symptom…

What is the source of your debt?

Is it poor financial control? Is it unexpected redundancy? Is it constant yearning for a better lifestyle?

Try and see the source of your debt problem clearly – don’t beat yourself up because you are in this situation, but do try and think clearly and honestly about why you are where you are financially.

Once you see the cause, you may be able to take action immediately, or it may be too difficult to tackle alone, so enlist the help of a friend, family member, or a reputable debt counselling service (who shouldn’t charge you for the privilege).

This extract was taken from the “Debt-Busting Chapter” of
Nicola’s book “The Money Gym : Wealth Building Workout”