Everyone likes to save money when possible. We clip coupons, buy in bulk, and avoid impulse buys to save each and every month. Unfortunately, the cost of goods and services are always on the rise, typically outpacing increases of income and eventually, those monthly bills become far more than a nuisance. They become barriers, siphoning-off discretionary income and that’s when you decide it’s high-time to do something about it.

You’ve made a lot of smart money choices, like buying a home and saving money for emergency situations. However, it’s not enough and you know you can do better. There’s got to be a way you can get debt-free, it’s just the problem of having to eat an elephant, which is a discouraging and seemingly insurmountable task.

Budgeting is Key to Paying-Off Debt

It all starts with your budget. Okay, so you’ve definitely heard this time and again but have you actually sat down and tracked-down where your money is going month after month? Financial planners do this regularly and are almost always greeted with shock from their clients when the numbers are clearly defined.

“Your debt-to-income ratio for the lender’s purposes is based on the minimum monthly payment for all of your credit card debt, student loans, car loans and personal loans—compared to your gross monthly income. In many cases the amount a lender will say you can borrow is higher than you may feel comfortable borrowing.” —Realtor.com

When you know where it’s all going, it becomes much easier to reign-in spending. A budget allows for prioritization and gives you a clear road map to follow. The difference between what you think you spend on this and that are much different than what you are actually spending.

Five Bad Debt Free Bets

Once you have a budget worked-out, you’ll want to begin to strategically target your debts and start to pay them down one at a time. This will require patience and some people mistakenly believe it’s just better to wipe-out their debts in one fell swoop. That leads to making one of these five bad choices:

1. Leveraging your home equity. While a line of credit or home equity loan is great for small home improvements, using it to wipe-out all your debts puts your home at risk. You can’t plan for the unknown and things like illness, a job loss, and other unforeseen events can be devastating. You are essentially gambling with the possibility of losing your home to foreclosure.
2. Increasing open credit lines. This money shell-game is just bad all the way around. By increasing one or more lines of credit to pay-off other debt, you’re not really getting anywhere. In fact, you’re actively sabotaging your own finances and that will most definitely be felt in the near future.
3. Plundering your retirement accounts. Here again, borrowing from your 401(k) to make updates around your home is fine because you pay yourself back with interest. Raiding those accounts however, comes with a hefty price in the forms of fees and taxes.
4. Selling-off real assets. Getting rid of that PWC or camper is smart because those items depreciate over time and there’s also the cost of insurance and maintenance. Selling real assets just to pay-off debt is also a gamble against the future, because you can’t possibly know what it holds.
5. Filing for bankruptcy. When there are no other alternatives left, this becomes an option. A common misconception is declaring bankruptcy wipes-out all your debt and that’s simply not true. If you file a Chapter 13, you’re obligated to pay certain debts, while Chapter 7 will seriously sink your credit score.

Do yourself a favor and don’t try and find an easy way out because it will bring a hard reality to bear. Instead, be disciplined and take it one step at a time.