Now that you have decided to get your finances under control, the biggest challenge is to pay off your debt. The biggest question probably is “where do I start?”. A lot of people are in complete denial when it comes to their debt level, until they reach a breaking point. Before you actually make any payment plan, you first need to know how much you owe, and to whom.

Go through your files and list every single debt you have. Include your mortgage, car loan, credit cards, lines of credits, student loans, personal loans, loans from family and friends, loans from work etc…etc. Also write the interest rate for each. Add everything up. Now, you have a clear picture.

Second, you need to have a budget in place. Not all your money can go towards debt repayment. You also need to save for your emergency fund. It may sound counter-productive to do this when you have massive amounts of debt, but you have to. Life happens. Set-backs happen. Accidents happen. If you don’t have any savings, how are you going to face an emergency? Yep, by creating more debt!

Now you have these systems in place, focus on your consumer debt, family and student loans. Leave out your mortgage and car payments, as these are in separate categories in your budget. A rule of thumbs is to allocate 15% of your net income towards debt repayment. To reach this percentage, you will probably need to cut down on other categories such as entertainment, vacation and restaurants. You may also need to increase your income to cover for all the items in your budget.

There are a few options to tackle your debt. You can seek a consolidation loan. This type of loan combines all your debts into a single monthly payment. It allows you to pay off your debt more efficiently and you will save on interests. The current interest rate for an unsecured consolidation loan in Canada is 5% to 6%. It also makes budgeting and saving easier. It is what I did for my own debt…so far, so good.

If you don’t qualify for a consolidation loan, you can start making payments on the highest interest-bearing debt you have and only make minimum payments on your other debts. Once you have paid it off, move on to the next high-interest one.

Or you can start with the smaller balance. A lot of people find this method keeps them motivated as they can see progress faster. You will pay more interests though.

The key to success for these methods is to close the accounts you paid off…and no open any new ones. Aim to pay off your debt within 3 to 5 years. Beyond that length of time, you will pay way too much interest and will most likely suffer from debt fatigue.