How’d You Get Here?
Before you can figure out where you’re going, you have to assess where you’ve been. Your approach to debt reduction very much depends upon how you got into this mess. The most important thing is that you pick a plan and stick to it.
The Daily Spender’s Approach: If you feel you’re living paycheck to paycheck but can’t stop the downward spiral, you’re probably not keeping track of your daily expenses.
If you have a chronic habit of eating lunch out everyday, buying those lattes every morning and “rewarding” yourself with lots of little purchases, you’ll need to develop a whole new way of thinking. The best option for you may be to calculate all your minimum monthly payments first. Then calculate what you normally spend on all these frivolous items each week, cut it in half, placing half of the money into your “Freedom Fund” account (paying yourself first). The other half will then be applied to your smallest debt to pay it off first and get that sense of accomplishment.
The Purchase Power Hungry’s Approach: Credit cards largely enable us to purchase our way into another social 
class. The middle class can now purchase $500,000 homes, big boats, vacation properties and big screen TVs, which wasn’t necessarily true in the past. Perhaps you’re barely paying your bills and feeding your family, but nevertheless, you’re hooked on big commodities, gadgets and lifestyle. After you realize that you’ll never get ahead this way, you may want to research ways to make more income so you can live the life you’ve imagined, without jeopardizing your family’s future. Perhaps you can take free online courses, transform a hobby into a moneymaker or change employers. You might have to sell off some of these big-ticket items and downgrade your lifestyle until you can get ahead.
The Unemployed’s Approach: Losing your job can be a devastating blow, especially if you haven’t saved up a cushion. Take a long, hard look at your finances and see what expenses you can drastically reduce or cut for the time being. Just pay only your minimum monthly payments initially until you have another job and look into government unemployment benefits for temporary assistance. Temp agencies often have positions that can be filled quickly for short-term cash coming in. Once you have a steady stream of income again, focus on building up that $1,000 emergency fund, then try to pay down your highest interest debts.
How One Couple Got Out
“Rich woman” coach Kim Kiyosaki and her husband Robert (author of "Rich Dad, Poor Dad") were like many Americans – they kept paying those minimum monthly payments but it seemed like their mountain of debt was never dissolving.
They stopped accumulating bad debt first: if they charged anything new on their credit cards, they had to pay it off in full at the end of the month, without exception.
Next they made a list of all their debt, including credit cards, school loans, car loans, home improvement, mortgage and personal loans. They filled in the amount they owed, the minimum monthly payment due and the number of months it’d take to pay them off. They then numbered their debts from the lowest to the highest number of months to pay off the debts. They started with the lowest number of months to pay an item off quickest to see instant progress they could feel excited about.
They used their ingenuity to generate an extra $150-200/month. There are a number of possibilities online. A weekend job or working a few hours of over-time can work wonders for the pocket book. Hobbies can be transformed into extra income. Garage sales can generate quick cash too. They used this supplemental income to put toward the next debt listed to pay off and before they knew, they were debt-free!
What does Dave Ramsey recommend?
Esteemed radio host and financial advisor Dave Ramsey is best known for three NY Times best sellers and his syndicated radio show, “Life and Money.” His approach to eliminating debt is opposite of conventional knowledge, which says “Pay off the highest interest rate credit card first.” Instead, Ramsey recommends what is called the “Debt Snowball” strategy. The idea is to pay off the smallest debt first to give you a sense of accomplishment and enthusiasm, in essence, getting that snowball of debt rolling.
In his book, "Baby Steps," Ramsey recommends a proven seven-step program. First, while paying the minimum monthly payments, he says you should start to accumulate an emergency cash fund of at least $1,000. Once this goal is met, you can take the next “baby step,” which is paying off all debt by using the “debt snowball” strategy, working your way to the largest debt eventually. The third step is to put three to six months of expenses into a savings account. Next, he says to invest 15% of your income into 401ks, Roth IRAs and Pre-Tax retirement plans. Step five involves funding college for your children with a 529 plan, step six recommends paying off your house early and the last step is to “build wealth and give.”
Video: Dave Ramsey - Guide to a step-by-step financial fitness program
What does Suze Orman recommend?
Suze Orman is a well-known financial advisor who has written six NY Times best sellers and currently hosts her own show on NBC. Her strategy for debt reduction is simple: Plan, Reduce, Eliminate. In her latest book. "2009 Action Plan," she discusses five steps toward financial freedom.
First, you must face your debt and pay off your credit cards, she says, paying the minimum for all cards to remain current, then starting with the highest interest cards and working toward the lowest. Orman recommends adding up all your minimum monthly payments and tacking on an additional $10 to calculate how much money to put down on the highest interest card each month. She added that this strategy is only salient if your job is secure and you have an emergency fund set aside. Otherwise, she said, cash accumulation is a better option to start with.
Secondly, you should try to raise your FICO score to lower crushing interest rates. This can be accomplished by paying more than the minimum payment each month, paying your bills on time, staying below your credit limit and refrain from cancelling any credit cards.
Thirdly, you’ll need to separate wants from needs and balance the budget by cutting out the wants. The fourth step goes hand-in-hand with this, which asks you to save enough money to cover eight months of expenses. Stretch what you think you can save each month by 20% and find a high interest rate savings account to bank it in.
Video: Suze Orman's 2009 Action Plan
Lastly, you should create a retirement action plan. Keep investing in a 401k and IRA, without panicking during the recession. Never touch this money. If you find yourself on hard times, borrow from the stock market instead.
Some Popular Debt Reduction Strategies:
Dave Ramsey’s Debt Snowball Strategy - Pay off smallest balances first, working your way up to larger balances.
Suze Orman’s Highest Interest Strategy - Pay off highest interest balances first, working down.
Mary Hunt’s Rapid Debt Repayment Plan - Divide total balances by minimum payment to calculate each card’s RDRP score, start with the smallest score and work up.
Jean Chatzky’s Program - Set goals, track spending, reduce interest / mortgage rates, sell assets.
Oprah Winfrey’s Debt Diet - Calculate debt, Keep a spending record, Pay off highest rate cards first and stop spending.
Steve Bucci’s Credit Score Rescue Plan - If you owe more than 50% of your credit limit on any card, pay it down to improve your credit score.
George Clason’s Seven Cures - Save 10% of your income, Control expenses, Invest, Protect assets from loss, Have a home, Insure, Turn your hobby into a moneymaker.
The Motley Fool’s 60 Second Guide - Spend less than you make, sort good and bad debt, pick two cards with the lowest interest to use, reserve the others for emergency, start with high interest cards, ask for lower rates, don’t miss minimum payments, commiserate with others and celebrate.