The new year is always a good time to reassess your finances and get a handle on where you are with your money, where you’d like to be, and set up a plan to get you there. One of the most important components of new year financial planning is examining your debt levels and working out ways to get rid of some of the least beneficial – or the most expensive – debts on your books.

Pay off debts

Start with the Most Expensive Debt First

You probably already know that there are two kinds of debt – good and bad. Good debts include things like a mortgage, as this is tied to a valuable asset that would likely recoup the debt if sold. Bad debts are monies owed that are not offset by anything of appreciable value. The most obvious of these is credit card debt, and the most expensive card is the one with the highest interest rate. Make paying this one off your first priority; cut other expenses until this card is paid off in full, then cancel it. If you’re having trouble determining which of your debts should be attacked first, get help from an expert such as Debt Rescue .

Cut Spending

Go through last year’s expenses and look for expenses that went over budget (e.g. a mobile phone bill when you used too much data). Where possible, have a go at re-negotiating these with your suppliers, or shop around for plans that better suit your usage patterns. See how much you can save on your utilities.

Create a Budget

Yes, the dreaded ‘B’ word. But one of the best ways to avoid accumulating bad debt is to have a plan for where your money goes – and to stick to it. If you don’t like the idea of a budget, then call it a money plan. Just make sure you do have one and that you follow it.

Knowing where your money goes via budgeting
photo credit: slightly everything

Know Where Your Money Goes

Once you’ve taken a good look at where your money is spent, you’ll be able to isolate your essential spends, like your power bill and travel expenses, from your discretionary ones, like your shoes and entertainment. You can then plan where and how you can cut out some of your unnecessary spending and using any spare funds to get rid of your debt this year.

Break Bad Spending Habits

Impulse buying and poor budgeting are bad money habits that can lead you into debt. There is no point working hard on getting rid of your debt if you do not tackle the root of the problem too. Develop a strategy to combat your risks. For example, if you find you overspend at the shops, make a list before you go and stick to that list.

The new year is a great time to get a handle on your financial situation and set some goals for the coming year. Getting rid of debt is a great goal to have for 2015. Once you’ve got your debt under control, you’ll be ready to look at wealth creation and saving.

Do you have any tips for getting rid of your debt this year? Share your hints and tips in the comments below.