End of Year Strategies: 5 Simple Steps to Paying Down Debt


Consolidation is one way to rid yourself of your debts quickly. But it is no panacea.

Even dentists often think about debt around the holidays, as the gift-buying season can have you considering taking on new debt. Even established dentists deep into their careers can struggle with accumulated debt. If you own your own practice, you’re faced with the constant balance of investing further in the practice, paying down debt, or taking some more of the practice revenue as income. How do you find the balance?

Related: Facing Up to Some Hard Retirement Truths

Consolidation is one way to rid yourself of your debts quickly by combining all your current outstanding loans and liabilities—and their potentially outrageous interest rates—into a single debt vehicle with a lower interest rate. But consolidation is no panacea; first, it won’t change the underlying behaviors that led to an accumulation of debt. Second, a consolidation may give you the illusion of lower debt, when in fact the overall debt hasn’t changed at all. Let’s look at some things to consider when tackling debt.

Step 1: Assess your debt situation.

You may think your debt is under control, or alternatively you may try not to think about your debt at all. But if you regularly use credit cards or lines of credit to meet basic monthly expenses, if you buy items on credit that you wouldn’t buy if you had to pay cash, and if you are at your credit limits and thinking about extending your borrowing capacity, you aren’t alone, but you may want to look closely at your spending habits and make an important adjustment.

Step 2: Identify “good” and “bad” debt. Stand pat on the former, and address the latter.

Mortgage debt that is less than a quarter of your gross income is unlikely to be “bad” debt, unless you are paying an out-of-market interest rate for some reason. Student loan debt is often among the “best” debt, because it generally has a low interest rate as well. But credit cards are almost always bad debt, no matter how many miles you may be earning. Pay off high-interest credit cards as soon as you can, because they will cost you in the long run. And during the holiday season, avoid store credit cards at all costs. One of my favorite bloggers, Two Cents’ Kristin Wong, wrote an indispensable post on this last year.

Step 3: Create or adjust your budget.

The budget is the lynchpin for all your financial endeavors. If you’re in debt, it’s even more important to identify how much income you have and where it’s going. Finding out exactly what you spend each month can be a big part of identifying areas that need to be cut back if you’re going to get out of debt.

Related: Nearing Retirement: Signs You Might Be Spending Too Much

Step 4: Consider a consolidation loan, but with caution.

Research interest rates of credit providers, including banks (and starting with the bank where you are a customer), and consider working with a financial advisor who can offer some tips. You’ll need some financial information, including updated credit card statements, pay stubs, and lists of investments. Shop around, and find out how much you can borrow and what the terms are for paying it back. Not all debt consolidation strategies are created equal.

Step 5: Pay off your debt, and don’t accumulate new debts.

Start making the bulk of your payments to your highest interest rate debt first. Then, move on the next set of debts. Make sure you don’t pay one debt exclusively while letting the others languish, as this will negatively impact your credit rating. In the meantime, make sure you aren’t accumulating new debt, as it will completely counter your strategy.

Start immediately, but don’t expect immediate results.

Just as with your savings and investment strategies, starting sooner rather than later will yield better results. But don’t be impatient about paying down your debt. Chances are you accumulated it over many years, and you can’t expect to be rid of it in an instant just because you started focusing on it. Chip away as you can, and put any extra income or found money toward your debt whenever possible.

Before you know it, you will be able to transition those funds to retirement savings and investments.

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