If you were to ask five different financial experts about the best way to get out of debt, you’d be likely to get five different answers. There’s no single “best” way to get out of debt and different methods will work effectively for different types of people. In order to choose the debt reduction plan that is the best fit for you, consider how each of these methods of systematically reducing debt would fit into your financial situation.

- The Interest Rate Method: This debt reduction method starts with listing all of your debts and sorting those debt balances by the interest rate associated with them. Your job is to identify the debt with the highest interest rate and put all of your energy into eliminating that debt. What this means is that you’ll need to make minimum payments on all of the debt on your list and then one payment as big as possible on your highest-interest debt. The idea is to reduce the interest charges by getting rid of your most expensive debt first and being able to devote more money to principle as you reduce your high-interest debt.

- The Debt Snowball Method: Another common method of debt reduction is to list all of your debts in order of their outstanding balances and start to knock off the debts one at a time starting with the smallest outstanding balance. This is more of a psychological approach to reducing debt as the goal is simply to have fewer creditors sending you bills every month. Again, you would need to make minimum payments on all of your debts and then devote everything possible to paying off your smallest debts one by one. As you eliminate monthly payments, you can devote more money to your bigger debts and receive fewer bills and notices in the mail.

- The Substitution Method: This method allows a borrower to chip away at debt by making small changes in his or her budget and devoting the money that they save to paying off debts. If you’re used to eating lunch at a restaurant every day, start packing a lunch a few days each week and putting the money you would have spent on lunch toward your outstanding debt. This method of debt reduction isn’t the quickest way to get out of debt, but small payments can add up quickly and you’ll develop good habits that can help you stay out of debt in the future.

- The Windfall Method: This debt reduction method takes great discipline, as it calls for the borrower to make big payments on their debts occasionally when they come into some money. This is a great debt management plan for someone with a commission job or with seasonal income. It’s difficult to use this method effectively if your income is steady each month.

For many borrowers the solution to their debt problems will be a combination of the methods described above along with a heavy dose of discipline. The common thread between these methods is that it requires the borrower to get organized and have a plan for systematically reducing debt. With that goal in mind, one of the above methods could be the right solution for you.

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Tags: debt management, debt reduction, debt solutions

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