First Person: My Get-Out-of-Debt Plan

As a financial adviser, I highly value financial independence. Particularly, after the credit crisis forced many firms out of business and millions of households into poverty, I consider financial freedom as a means to future success.

I carry a debt of $7,500 in credit cards, a student loan of $2,000 and a car loan of $1,500. I pay monthly installments of $1,300, and according to my amortization table I will be able to pay off my debt in 15 years. This is how an amortization table should look like.

The three A's of My Get Out-Of Debt Plan

To improve my financial situation, I have crafted a get out-of-debt plan that is aimed at individuals who continually accumulate debt. The plan is based on awareness, anticipation and action. In the context of personal finance, these concepts can offer guidance and financial stability.

Awareness

It is impossible to take control of your finances if you are not aware of them.

List all your debt including credit cards, car loans, student loans, personal loans, and medical bills and sum them up including decimals. When adding many numbers, decimals generate a wrong figure, which is then used in another arithmetic operation and produces a new wrong figure. Ultimately, the picture you have for your financial situation is mistaken.

Create a debt allocation table to see how your debt is owed and on what interest rate.

Your table can have three columns: "Debt", "Amount Owed" and "Interest Rate".

In column "Debt" include each source of your debt. If you have three credit cards, include each credit card in a separate line.

In column "Amount Owed" include the correspondent amount in each source of debt.

In column "Interest Rate" include the correspondent interest rate to each source of debt.

This is how your debt allocation table should look like.

Anticipation

Anticipating sudden expenses might require drastic changes in your lifestyle.

Control your grocery shopping by planning your meals, making a grocery list, buying in bulk, using your freezer, and using coupons.

Lower your energy bill by controlling your thermostat, using energy efficient appliances and bulbs and installing insulation.

Use the envelope system. Identify your spending categories, create an envelope for each category and allocate the proper weekly amount of cash to each. Once your envelope balance is zero, you cannot spend anymore.

Set up an emergency fund to avoid 1) borrowing from your IRA or liquidating your 401k, and 2) borrowing from your credit cards. Set three to six months worth of your living expenses aside in an emergency fund to cover up for a financial emergency.

Action

Start paying off the higher interest rate credit card. If the minimum payment is $80, pay at least $90. You won't notice the extra $10 but it goes directly onto your principal, reducing your debt even faster. The extra money that you will have can be used toward paying off the next high interest credit card bill.

Start using cash. You can control your finances by knowing how much money you have in your wallet. You don't incur any hidden fees or over-the-limit charges on your bank account. You can get discount for paying in cash.

My Get Out-Of Debt Plan May Not Work For You

It took me quite sometime to take action on managing my debt because I didn't know what to do. Although my debt is not that high, still I need 15 years to pay off, which is a lot of time.

Each situation is unique and even if you carry the same amount of debt, it doesn't mean that my get out-of-debt plan will certainly work for you. However, it can work as a guide to walk you through some vital steps that will help you understand where you are today and most importantly, where you want to be.

Every day we make financial decisions, which have an impact on the quality of our lives. Being financially independent means different things to different people. To me, it means security, and the option to fulfill my lifetime dreams. The steps to financial freedom may not give me immediate happiness, but they give me choice.

More from this contributor:
How to Choose a Debt Relief Program
How to Survive a Bankruptcy Filing
What to Do when You Can't Pay Your Taxes