1. Make a list of all your debts.  List everything.  Include car payments, bank loans and lines of credit, credit cards, store-issued cards, student loans, tax liens, and any other credit lines that require periodic interest or principal payments.  This list should include the lender, the loan type, the terms, and the current balance.  You can use this information later to build and maintain your pyramid of priorities.

2. Create a simple, but detailed, budget.  Start from your check register or bank statement to realistically and honestly estimate your monthly income and expenses.  There is no need to get fancy.  Popular spreadsheet software often includes personal budget templates, or you can find many free templates on the internet.  The important thing here is to “get real” about what you make and what you spend.  We have all heard that admitting we have a problem is half the battle.  In this case, you can often win the war just by recognizing some of the unnecessary expenses that are draining your bank account.

3. Build a pyramid of priorities.  After you have listed all your debts and created a budget of regular expenses, you can create a pyramid that will help you prioritize where your money should go.  The foundation of the pyramid is made up of the expenses that you just cannot live without (in other words, you cannot make money without them): car payments, gas, public transportation, and basic utilities such as power and water.  Do not include cable/TV services, home alarm service, or telephone service, since these are luxuries rather than necessities.

The next level of the pyramid includes expenses that provide security but can often be delayed for a short time, scaled back, or renegotiated: mortgage or rent payments, cell or landline services (not necessarily both), and insurance expenses.

As you move up the pyramid, the layers should move from fundamental, necessary expenses to more optional, flexible spending.  Credit card bills should be in the top layer.  This pyramid should guide you in setting your priorities, from the base to the top.  As the width of the layers decreases as you move up the pyramid, the relative amount you spend on each layer should decrease.

4. Be faithful to your budget and priorities.  If you have been honest about your income and expenses while creating your budget and diligent in setting your priorities, this will be easy.  But as you go along, you will be faced with new temptations and decisions about where and how to spend your hard-earned dollar.  Although the steps above are critical to managing your debt, this step will make you or break you.  If you are tempted to spring for that double shot latte, remind yourself where you started and pledge to never go back there again.

5. Mind your credit report.  As your debt is reduced, your credit score will improve.  You should not assume, however, that what is reported by credit agencies is accurate.  In fact, most people are surprised to find that inaccurate information has made its way onto their credit reports.

Most states now have laws that grant you regular free access to your credit report.  Do not be tricked into paying for your credit report.  The only web site that offers free credit reports is www.annualcreditreport.com.  Be sure to review your credit report from each of the three credit reporting agencies at least once each year.  Now that you’ve gotten your debt under control, you’ll want to be sure that your credit reports reflect your success!

By following these simple routine practices, you can learn to manage your debt and not let it manage you!  Being financially responsible is important and something that is never too early to start!