A 4-Step Plan to Start Climbing Out of Debt Today

It can happen days, months, or years after getting your first credit card.

One day you look at the bill, and the minimum payment is almost out of reach. Years of purchases, enumerated monthly on sheets of paper, spell out what seems to be a lifetime of repayments and a small fortune in interest accrual. Maybe using those credit cards got you through college and you never broke the habit. Maybe you've got a sweet tooth for shopping. Or maybe, like so many people in this era, you and your family have fallen on hard times, and when the choice was between seeing your electricity cut off or putting the bill on credit, a little extra debt didn't seem so bad.

However it happened, now you're mired in debt and staring down a mountain of bills just as you're trying to position yourself for retirement. It's a horrifying situation, one you never expected to find yourself in, at least not now, when you should be dreaming about your upcoming golden years.

Take a deep breath. You're not alone. And you can dig out.

Step 1: Know thy enemy.

Before you can do anything about your debt, you've got to know where your finances actually stand. Map out your current financial status, including all those ugly bits you'd just as soon not mention.

First, write out a detailed budget for your regular expenditures. Of course you'll include the usual suspects -- mortgage/rent, utilities, telephone, and groceries. But don't forget to widen your budget to focus on other regular expenses.

Do you subscribe to Netflix (NFLX)? Pay a monthly fee for cable? How much are you spending on entertainment? Dining out? Shopping? What about those once-a-year expenses it's so easy to forget, like insurance, new eyeglasses, car maintenance, or new school wardrobes for the kids? Figuring in all of these numbers will help you determine the true state of your finances.

But you can't stop at a budget and call it a day. You need to map out the exact amount of debt you hold and itemize it based on its source. You've already plugged your cards' minimum payments into your budget. But now, take it a step further and create a new chart listing the balance, interest rate, and minimum payments for each of your debts. Don't forget to include student and auto loans, too!

Once you know what you're dealing with on both sides of the financial coin, you can begin your quest to drive down your debt.

Remember: It's not easy. But it is doable.

Step 2: Snowball like it's December.

Now that you know the cold, hard facts of your financial situation, it's time to get to work. You want to make your money work for you in an efficient manner -- after all, with interest rates bearing down on your accounts, time is of the essence!

One word: snowball.

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Now, in order to make good use of the snowball method, you've got to have the funds for your minimum payments well in hand. (If you don't, then scroll on down to Step Three and I'll meet you back up here when you're finished.) The key to snowballing your debt is to pay the minimums each month on every debt, but then take an additional amount and apply it to one predetermined debt -- let's call it Debt A -- until it dwindles down to nothing.

Once Debt A is gone, you take the money you were paying on it (minimum and extra together) and add it to what you were paying on Debt B until that debt is paid off. Lather, rinse, repeat until you're debt-free.

If you're looking for a quick win, select the debt with the lowest balance and work your way up. You'll feel a sense of accomplishment sooner, which will help keep you on track toward your long-term goal.

But even though I'm a fan of the quick payoff, this snowball method isn't my favorite. Find the debt with the biggest interest rate and get to work. It doesn't just pay down your debt; it also saves you all the extra interest you would be paying, and a few extra percentage points can really add up.

So if I had three credit cards that looked like this:

Then I would arrange my snowball like this:

This way, no matter what the balances are, I'm paying down Card C quicker so I don't have to sacrifice as much of my hard-earned money to interest alone. It takes diligence to pay in to a card that may not seem like the "quickest win," but it'll save you some cash in the long run.

Step three: Give your cash flow a nudge.

Use your current profession as a jumping-off point for additional work -- if you're a teacher by day, why not be a private tutor by night? Or set your alarm clock for the ripe old time of 3 a.m. and head out for a paper route (they're not just for kids on bicycles anymore).

In short, sometimes the key to debt reduction is to give your cash flow a quick infusion. It's often inconvenient, to be sure, but the payoff can be worth it.

Step 4: Invest in your future.

It may take months or even years, but if you consistently pay down your debt, you will eventually see the light at the end of the tunnel: financial freedom. It's not a bad place to live. But your journey doesn't end there.

Once you're debt-free, your former snowball can help manifest those golden years you've been dreaming about. You can save that money in a savings or money market account. Create an emergency fund that will sustain you through life's tough times (and life does bring with it some unexpected crises) so you won't have to load up your credit cards with expenses you can't afford to pay back. When you've got that under control, keep on saving -- with an eye toward a long-term account to fund your retirement dreams.

If you've got a long-term time horizon, you might want to consider investments that bring a higher return. If you're long on time but short on expertise, an index fund or ETF, such as the Vanguard Total Stock Market Index (VTSMX) or SPDR S&P 500 (SPY), may be a sensible choice. With one investment, you'll access companies spanning the breadth of the S&P 500, including ExxonMobil (XOM), General Electric (GE), and Microsoft (MSFT).

The path from the red to the black side of the ledger can be long, but take heart. With some deft financial moves and a basket of patience, you can climb back out -- and with money in your pockets, to boot.

Hope Nelson-Pope is online coordinating editor at The Motley Fool. She owns shares of Microsoft but none of the other companies mentioned in this article. The Motley Fool owns shares of Microsoft and has sold short shares of SPDR S&P 500. Motley Fool newsletter services have recommended buying shares of Netflix and Microsoft, as well as creating a bull call spread position in Microsoft.