How to Spring-Clean Your Debt

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Spring is in the air. Most people use the first blooms of the season as a signal to begin the process of spring cleaning; out with the old to make room for the new.

The same thought process should be applied to your finances. While you are in the mindset of minimizing, organizing, and cleaning out the old, you should capitalize on this mood as it pertains to your debt. Take the time to give yourself a money makeover and tidy up your financial life by shedding lingering debt. Here are the steps you can take to do it.

Take stock

An important part of getting and keeping your finances in shape and eliminating debt is organizing them. Start by taking a realistic look at where you are financially and exactly what you owe.

First, evaluate your debts.

• Make a list of outstanding consumer debts, not including your mortgage (credit cards, car loan, student loans, personal loans, etc).

• Write down the total amount due for each debt and the interest rate.

• Add up your total consumer debts (with the exception of the mortgage).

• Write down the minimum payment for each debt and calculate how long it would take you to pay off the debt making only the minimum payment.

Once you have your debts organized, it's time to evaluate your budget.

• Make a list of all of your non-consumer bills for the month (utilities, cable, groceries, pet expenses, gas and transportation, internet, cellphone, gym membership, Netflix, etc.).

• Using the figures from three months' worth of bank or credit card statements, tally up how much you spend eating out, on snacks, clothes, entertainment, and other miscellaneous items. Don't forget happy hours, movies, trips, salon visits, and hobbies.

• Create categories of nonessential bills based on how you spent your money. For example, your categories could be dining out, grooming, clothes, entertainment, hobbies, etc.

Once you everything written down and sorted out, it's time to play a game of what if. Look at the total of what you owe and figure out how much of your budget is being consumed by consumer debt. If it's over 30 percent, you need to seriously commit to bringing that percentage down.

Next, calculate how much you could save in six months if you had no consumer debt. What if you had half your current debt? How would it change your life if your total consumer debt was zero?

Lastly, look at all of the nonessential things that are eating away at your money, such as dining out, grooming, or needless shopping. Pick one or two of those categories and see how much you could save if you eliminated that expense. For example, what if you stopped eating out for a month and maybe cut your own hair or gave yourself a manicure in lieu of paying for it? How much cash could you free up?

The goal of this exercise is for you to see where your money is going and take responsibility for it. It is also to show you the opportunity costs. If you changed just a few key things, you could eliminate your debt in no time and change your financial future. (See also: 6 Common Debt Reduction Roadblocks — And How to Beat Them)

Create a debt reduction plan

Now that you've gone through sorting through your finances and playing what if, it's time to start ridding yourself of the unnecessary financial weight. The easiest way to do this is by using the debt snowball method. With the debt snowball, you simply list your debts from largest to smallest. You then aggressively work to pay off the debt with the lowest balance first, while paying the minimum payments on the others. Once you've paid off the first debt, you move to the next smallest debt. Rinse and repeat. (See also: 6 Secrets to Mastering the Debt Snowball)

The plan itself and the logic behind it is pretty basic. You begin with the lowest balance instead of the highest interest rate in order to help you build momentum and get a quick win. Winning is motivating. Losing sucks. Pretty simple stuff, right?

The tricky part of expedited debt repayment is finding the extra money in your budget to apply to your debt. And that can be tough to do when you're living paycheck-to-paycheck. Go back to the list of expenses you made and figure out what you can cut and where you can scale back.

From there you need to create a realistic zero-based budget that reflects your true spending habits. With a zero-based budget, you give every single expenditure a name, subtract them all from your income, and if you end up with more than $0, every extra dollar goes to your debt elimination plan. (See also: 5-Day Debt Reduction Plan: Pay It Off)

Plan something fun

If you have committed to doing the things outlined above, it is imperative that you also plan to do something fun. You need to pause from time to time during the debt repayment process to celebrate how far you've come. It should be something you enjoy and can pay for with cash.

Take a day trip somewhere. Treat yourself to a nice, modestly priced pair of shoes. Get your hair done or spend the day at a reasonably priced spa. Try not to look at this pause as a waste of money. The goal is to practice spending in a controlled manner on things that have meaning to you, and most importantly, that you can afford.

These pauses will help you to establish a healthy and productive relationship with your cash. Money is a tool and it should be respected and handled wisely. You should use your purchasing power to provide for your needs and a few of your wants. (See also: Yes, You Need "Fun Money" in Your Budget)

Handling finances is a mental and emotional activity. By going through these steps, you are forced to face your spending choices while addressing your connection to material possessions. This process will help you hold yourself accountable and set you up for a successful jump-start to your debt reduction plan.

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