Debt is a form of leverage- by using debt you can do more now with less- but for those of us familiar with how a lever works, there's a tradeoff- the metaphor of the lever is an apt one.  If you picture a lever with twice as much arm on your side of the fulcrum as on the side of the load you want to lift, you'll note that you're in a position to lift twice as much as you might otherwise be able to lift- at the cost of having to move twice as far.

In like manner, although the tool gives you lifting capabilities you otherwise wouldn't have had, you end up paying more for the ability to do it now.

Debt is a powerful tool, but like any powerful tool, if it gets away from you it can be a big liability.  This article will suggest some methods for looking at debt, and will also outline a method by which to get out of debt for good.

Good Debt, Bad Debt

Although conventional wisdom suggests that debt is a bad thing, (we constantly hear advice like 'stay out of debt', 'never go into debt', 'avoid debt like the plague'), debt is just a tool, void of inherent 'goodness' or 'badness'.  Without debt instruments like Mortgages or loans many of us would never own cars or homes.  Without debt instruments like bonds or stock many companies and municipalities would never be able to finance themselves.

Instead of viewing debt itself in terms of 'goodness' or 'badness', it's probably more precise to view our relationship to debt in terms of whether it serves you or not.

The difference between 'Good debt' and 'Bad debt' is in what you're buying with the debt- are you getting yourself an asset, i.e. something that will put cash in your pocket, or are you getting yourself a liability?  By this rationale, your college education might be considered 'good debt' if it resulted in you getting a higher paying job than you would've had you not invested in your education.  A mortgage on a home could be considered 'good debt' if the price of the home goes up and you decide to sell.  A mortgage on a rental property that makes you a positive cash flow is definitely good debt.  By comparison, a car loan (cars never appreciate or put money in your pocket) is bad debt- your car, love it however much you may, is a liability.  Status symbols, (your new furniture, that rolex, your designer Italian shoes) even those with intrinsic value, are generally bad debt- you probably couldn't sell them at a profit and until you choose to liquidate them, they're liabilities.

The problem most people have with debt is twofold: they've overextended themselves, and they've used debt as an instrument by which to buy a liability.  Debt can be a powerful tool, and you can use it to great advantage- if you're prudent.  I would urge you to set aside the belief that all debt is bad- if you shy away from debt, you may save yourself the possibility of abusing it... but you'll also be taking the financial slow road in many cases.  Better to shy away from abusing debt- that way you can get the benefits without the pain.

This article will briefly describe a way to get out of debt and stay out of debt.  It's not a gimmick, it's a system that simply works.  We'll focus on credit cards for the purposes of this article, but this works for most kinds of debt.

Credit Cards- Cut them up?

If credit card debt has become a problem for you, common wisdom says that the first step is to cut up your cards and start paying down your debt as aggressively as possible.  This may sound reasonable, and it works, but it works badly, slowly, and it doesn't really help you.  I would go so far as to say that this approach is a BAD IDEA.

If you got into trouble by punching every cop you met in the face, you wouldn't chop off your hand, would you? No, you'd stop punching cops in the face every time you met them.  You'd do what it takes to learn the lesson that punching police officers in the face is a very bad idea- or else you'd go to jail for a long, long time.  Your credit cards are the same way.  If you don't learn to be responsible about using your credit, if you don't learn how to manage your finances, you'll never learn this life lesson and you'll be doomed to repeat this process for the rest of your life, so long as you have access to credit- and you'll be in debt and lose your credit for a long, long time.  The problem isn't that you've got a shiny credit card, the problem is that you're not handling it appropriately.  A credit card is an excellent tool for managing your monthly expenses (especially if the card has other benefits, such as airline miles) and it's only a liability if you use it to spend more than you make- that is, it's only a problem if you abuse it.

Cutting up your credit cards to protect yourself doesn't solve the problem- all it does is help you to avoid it- for a little while.  Avoiding credit cards in order to keep yourself from getting into debt is like treating the symptoms, rather than curing the disease.  In this case, what's causing you problems is your lifestyle versus your income- whether it's just bad luck or you're spending out of control, they're not adding up. (By the way, there's no need to beat yourself up about it- this is usually unprofitable, so instead of feeling bad, focus your energy positively on finding creative ways to solve this.  You'll be amazed at how good just having a plan that's working for you will make you feel.)  You can simplify your lifestyle, you can increase your income, (or preferably, both) and that will get you back to flying level.  As they say, if you're in a hole already, stop digging.

Go after Interest Rates First

Now, once you've evaluated your spending and begun investigating ways to increase your income that make sense to you, it seems like it would make sense to devote all of your discretionary income towards servicing your debt, right?  ...well, you could do it that way, but this way is hard, slow, difficult, and painful.  You've been looking at your expenses, you've probably noticed one big one: the interest on your debt.

The interest on the debt is bleeding the life out of your personal budget, and it is the first place you should start. Call your credit card company, tell them you're doing a debt reduction plan, and ask them to lower your interest rates.  If they tell you that they can't do that, or that they're not authorized, ask to talk to someone who is.  Be polite, but firm- customer service folks at card centers are all authorized to help you out this way, and it's impressive how accommodating they can be when words like 'bankruptcy' come into play- you may see your interest rates go down to 2,3, or even zero percent.

Other options for reducing your interest rates might include balance transfers, or consolidation loans- be sure to investigate these as alternatives if your credit card issuer is uncooperative, but be wary of adjustable rate loans with low introductory rates that'll go back up in a few months.  Another excellent alternative is to use a non- profit credit counseling agency- they have considerable clout when it comes to dealing with creditors and have generally good track records at reducing your ongoing expenses when it comes to debt servicing- and usually they can get your interest rates drastically reduced.  Usually, using a credit counseling agency will show up on your credit report- but if you've got to choose between paying forever or defaulting and dealing with your debt burden effectively, use the agency- you'll save yourself a lot of money, pain, and anguish.

If you have multiple debts to pay off, you've got several strategies available to you- you might consolidate them all into one loan and get a low interest rate on that account, or you might just pay the minimums on all but one and hammer that one down quickly, and then go to work on the next one.  This strategy can be very satisfying, because it breaks the process down into individual goals and you can have a party for each one you pay off.  You may choose to pay off the debt with the highest interest rate first, or you could just go after the smallest one first- it depends on whether you want the party sooner, or whether you want to pay less.  If you celebrate your progress and have fun with it, it feels a lot less like work. :-)

Debt Servicing Lifestyle?

Once you reduce your expenses in terms of interest and lifestyle, do you devote 100% of your discretionary income towards paying down your debt?  It seems like it's the best advice, but again it is the hard way.  Yes, pay down your debt aggressively, but do not let your debt servicing interfere with your other financial activities- activities such as investing for your retirement, saving up an emergency fund (you want 3 months' worth of expenses in this fund so you won't need to use credit in case of emergencies) and enjoying your money.  This last one is as important as the first three!  If you don't enjoy your money, if you relate to money as a burden or a problem or a liability, it's tough to get excited about dealing with it- and if you don't deal with it regularly, if you don't manage your money and enjoy doing so, you'll find ways not to manage it and it'll get back out of control on you.  Remember, what you're doing here is establishing a system that works for you, and make using that system into a habit.  If you keep it fun, it'll be easier.

Managing your money is full of details, but the principles are pretty straightforward.  If you devote 100% of your energy towards one thing, you'll punish the hell out of that one thing, you'll solve it quickly- but the problem is that you'll neglect the rest in doing so.  If you pay down your debt but don't have an emergency fund to draw on if an emergency comes up, you'll be stuck borrowing again to cover it.  If paying down your debt takes a long time and you've neglected investing for your retirement, you'll be stuck having to work during your retirement years- you want your money working for you, not the other way around.  If you pay down your debt but get frustrated with eating mac&cheese non-stop, you'll resent 'being responsible', you'll equate 'being responsible' with 'no fun' and the temptation to splurge on something outrageous will become intense.  We are whole beings, if we neglect one part of our lives it'll come back and get us.  You wouldn't play baseball with everyone at shortstop, would you?  Sure, you'd get every ball that went between second and third base, but you'd lose the game because there's more to the game than what's going on between second and third.  For the same reason, it's a bad idea to play the money game with all of your attention on your debt.

The key here is to make balanced and responsible financial living into a lifestyle unto itself, to make managing your money a habit- and a sustainable one at that- otherwise, what will happen when you've finished off your debt?  If your lifestyle isn't sustainable and easy, the temptation to go back to how you were before you 'got responsible' will be intense and you'll end up creating the same situation you had before.