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You can't put the power of compound interest on your side if you carry a lot of debt, so if your personal balance sheet is upside down, you should focus your energy on kicking your debt to the curb.
To help you get the ball rolling, we asked a team of Fools to share their top idea for getting rid of debt quickly. Read on to see what they had to say.
Focus on the smallest debt first
Ramsey instructs his followers to list all their debts from smallest to largest. From there he suggests paying the minimum amount on every debt and throwing anything left over at the debt with the smallest balance. Once that debt is completely paid off, you refocus all of your effort on knocking out the second-smallest debt, and so on until you're completely debt-free.
Critics of this strategy will point out that it's not the fastest way to rid yourself of debt. Mathematically speaking, it makes more sense to pay offyour debt with the highest interest rate first. However, Ramsey's counterpoint is thatby focusing on your smallest debt you'll see that your plan is working more quickly than if you only focused on the debt with the highest interest rate. In turn, you stand a much better chance at staying motivated throughout the entire process.
I think he brings up a strong point. After all, if you have a lot of debt, this process could take years to complete, and I think Ramsey's plan offers the best hope of keeping the average person engaged enough to see this process through to the end. That's why I've become a believer in his process as the smartest way togo.
Find a second source of income
Jason Hall: The fastest way to pay down your debt may be to work more. This is especially true if you're also behind on some of your financial goals, and the only other way you could get ahead of your debt would be to cut back on retirement or rainy-day savings.
Image source: Getty Images.
Frankly, if you've managed to get yourself into a lot of debt, you may need to make some big sacrifices to get out of it. Waiting tables, stocking shelves, or running a cash register may not be the ideal way to spend your downtime, but it could be the best thing you could do to pay off your debt as quickly as possible without compromising your other financial goals.
And even if you don't have the time or inclination for a traditional part-time job, there are other ways you can pick up extra income. Gigs such as freelance writing and transcription work, driving for a ride-share company, or consulting for a small business in your area of expertise are the kinds of income sources that may be ideal for your situation.
Formulate a budget and stick to it
Sean Williams: America may run on debt, but if you have a lot of debt, it can be crippling. While my Foolish colleagues can offer a bevy of unique ways to rid yourself of debt, my solution is as simple as it gets: Formulate a budget and stick to it.
Chances are that the reason you're in debt is you haven't kept a detailed monthly budget. According to a 2013 poll from Gallup, just 32% of all households kept a monthly budget, which makes it nearly impossible for consumers to maximize their ability to save and understand their outgoing cash flow. If you have a stranglehold on your cash flow, you'll be able to make adjustments to your spending habits and make short work of your debt.
The good news is that formulating a budget is easier than ever, since everything you need can be found online. In roughly 30 minutes a month you can have a working budget. Arguably the bigger challenge is having the discipline to stick to your budget. Here are a few tips that could help:
- Set up weekly or monthly automatic withdrawals from your paycheck or checking account that you'll use specifically to pay down debt. Having your withdrawals be automatic keeps you accountable for your spending habits.
- Consider putting your spending money into separate accounts representative of your budget categories (entertainment, food, and so on) to avoid the temptation of pulling money out of a centralized checking or savings account.
- Make sure your goals are S.M.A.R.T. -- specific, measurable, achievable, realistic, and time-based. The vaguer your budgetary goals are, the more chance you'll fail to save enough to eliminate your debt.
- Lastly, get everyone involved in your household, from kids to grandparents. The more you surround yourself with like-minded people, the more likely you are to be successful.
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