Budget: How do I get ahead of monthly debt?

Being in debt—be it car loans, student loans, or credit card debt—can be frustrating. Breaking the cycle of endless bills may seem overwhelming but, with some careful planning and budgeting, getting out of debt is possible.

While the best approach to paying down debt varies by individual, there are some general guidelines you can follow to determine what to pay and how much.

At the very least, you need to pay the minimum balance due each month on all debts to avoid racking up late charges. Beyond that, there are several approaches you can take to getting debt under control.

The first is called the Snowball Method. In this approach, you want to pay the minimum due on all but one: the smallest source of debt. For that debt, you want to chip away at it with any extra funds you can until it’s gone. Then, move onto the next smallest debt and take the same chip-away approach, applying what you paid to the now paid debt to this new targeted debt to help resolve it even faster. While this approach will have you paying more interest on the larger debt sources, you will experience a lot of wins along the way that may help keep you motivated to stay on task.

A second approach is to target the debt source with the highest interest rate first. Again, you want to pay the minimum on all other sources of debt first, then put whatever extra you can toward your highest-interest debt. As with the snowball approach, the aim is to chip away at one debt source at a time. The advantage of this approach is that it does help limit the total interest you pay.

If you’re having a hard time meeting your monthly payments due to having multiple high-interest credit cards and debt sources, you may benefit from debt consolidation.

As the name suggests, debt consolidation involves combining all your debt into one payment. In some cases, you can do this yourself with a balance-transfer credit card. If, that’s not an option, you might consider debt consolidation through a home equity line of credit (HELOC). In this case, the lender pays off all your existing debts and rolls them into a single loan with just one payment. While the new interest rate may be higher than some of your existing debt sources, very often consumers wind up saving money by avoiding missed and late payment fees. However, not everyone qualifies for a HELOC for consolidation, and it can draw out the life of your debt. Depending upon your short- and long-term financial goals, consolidation may or may not be a fit for you.

Another option is a personal loan. This approach only makes sense if the interest rate on the loan is considerably lower than what you’re paying on your existing debt sources.

Regardless of what approach you take to tackling your debt, a non-negotiable next step is establishing a monthly budget and an emergency savings account to help ensure your debt doesn’t grow out of control once again. Most experts recommend you have enough money in your emergency fund to cover at least 3 to 6 months' worth of living expenses. Again, you don’t need to bank that at once, but you do need to conscientiously work towards establishing that essential savings.

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, investment or legal advice.