This is part 5 of the 5 part series “Dig Yourself Out of Debt”, published every Thursday. Surfing old posts? You can catch up on Part 4 by clicking here, or start at the beginning by clicking here.

Hopefully by now you have worked out what you owe, started spending less than you earn, got your avalanche rolling and worked out why you ended up in debt in the first place.

Is there anything you need to do beyond that?

Just a little bit of housekeeping really.

Credit Reports

In part 1 I talked about using your credit reports to find any errant accounts you might have forgotten about.

Credit Reports provide a much wider view of your financial wellbeing than just who you owe money to, though. Now would be a good time to badger me to finish writing my “A Guide To: Credit Reports” and see all the different pieces of information they show, why they are important, and how to correct them if something is wrong (or doesn’t tell the whole story).

In the meantime log back in to your credit reports and take a careful look at all the information they present. Are there any inaccuracies? Are you linked to anyone you shouldn’t be?

Keep Records

While you and I were busy burying our heads in the sand and avoiding creditors, I suspect your record keeping was a little lacking in the accuracy department just as mine was. Everything that came through the door got filed under ‘S’ for Shredder, ‘R’ for Recycling or ‘P’ for Piles and piles of letters out of the way somewhere.

Now you have got to grips with yourself and your finances, get a proper filing system organised. There are lots of different methods about, but get yourself a filing cabinet, box file or some other container and get sorting.

Properly accessible financial files protect you in case of error. It makes preparing to apply for a loan or mortgage that much easier. Good recording keeping also enables you to analyse your financial life down the road should you wake up one morning and wonder “Just how much has my car cost me in its lifetime“?

Lost for where to even begin? The Simple Dollar has laid out the system I use now, or if you want to be 21st Century about it, check out the digital filing system that I want to try soon.

Reclaim Charges

This is not a guaranteed process,but for the sake of the few pounds it will cost you, it is worth spending the time to do. Few people would have gone through their own debt meltdowns without getting dinged for fees on bank and credit card accounts hourly or daily at the worst part of your journey. In the worst cases some people have reclaimed over £20,000. Some, as little as a few hundred pounds. The point is it is your money, the banks and credit card companies in the majority of cases had no legal right to fine you (only to recoup their ‘reasonable costs’), so you get to claim back with interest.

Keep Reminders

Now you are working towards getting out of your debt hole – or if you already have – keep reminders around you in the places you are likely to spend money. If you are working towards buying a house, put up a picture of your dream near your computer if Amazon is your weakness. If you like a double-mocha-skinny-latte instead, put a smaller picture of the same thing in your wallet.

Always count to 10 on the smaller unnecessary purchases, and keep a 30 day list for the larger ones. These tips and others are explained in my Frugal Friday! post for September 18.

I told you there was not much more to do, and I wasn’t kidding! Debt is just a very small slice of the whole ‘personal finance pie’ though, and I would hope and encourage you to stick and keep an eye on the entire pie to get tips all over the place for saving and growing your money.

This is part 4 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can catch up on Part 3 by clicking here, or view every post in this series by clicking here.

I think it is fair to say that the world loves us to spend money. This in itself is not an issue; spending money keeps the economy revolving, keeps people employed, goods being manufactured and exported and taxes incoming. The problem begins when we start to spend money that is not ours.

Throughout this “Dig Yourself Out of Debt” series, we have worked to pay back money we owe to others because we have borrowed at some point – or at lots of points – in our past. It may have helped pay for home renovation, holidays, a new car or two, or just lavish lifestyles that our incomes did not support alone. In effect we were spending more than we were earning, and taking on debt to cover the difference.

If we are to stop ending up in the same position after working so hard to pay off the debt we are in now, a true shift in perspective is required. Much like when people “go on a diet”, this gives the false impression that at some point the diet will end, and everything will be great. For a while it is, but the weight soon starts creeping back on as we return to old habits. A chocolate bar here, an extra meal out there. Before most dieters know it they weigh more than they did before they started.

Those who succeed over the long-term where weight loss is concerned never went “on a diet”. They engaged themselves in a change of lifestyle. They did not delude themselves that at some point their being good will come to an end and they can return to their old ways. They decided to change their relationship with food and exercise forever.

Getting out of debt is not a short-term fix. It is not a short temporary hardship – it requires a complete monetary rethink, much like a person who maintains successful weight loss changed their entire lifestyle. Live according to your means, not up to your expectations. If your net (take home) pay is £850 a month then you need to realise that a lavish lifestyle is just not yours to be grasping. Until we acknowledge this reality we will never break our spending addiction.

Any attempt to live like you earn 3x the amount you do will simply end up returning you to a mountain of barely serviceable debt. Spending this will make you no happier than if you simply had not even bothered trying to delude yourself and others in the first place.

With that in mind, here is my ‘Debt Psychology 101′.

Stop keeping up with the Jones’. Our society places an artificial need and desire to “one up” our neighbours and social peers. If your next door neighbour drives a Mercedes, then your ‘need’ to go out and buy a Lexus is niggling away at you day in, day out because we don’t like being perceived as inferior to others. Does your friend have an iPhone 3G? How many times have you wanted to go out and get yourself a 3G S to get one better than him?

Appearance is not everything. Your neighbours may have two Mercedes and a Land Rover Sport on their driveway, but they have likely sunk themselves into debt servitude to do so as I highly doubt that they have gone and purchased them outright, especially in the current economic climate. They will be saddled with debt from their desire to put out a perception of wealth that is as hollow as a malteser. It might appear hard on the outside, but it’s full of holes on the inside. Their income may be significantly higher than yours, but it is likely their debt is significantly higher as well. Side-by-side, you are probably better off than they are.

I drive a 7 year old car that I could replace with something newer if I wanted to give out a better appearance of my financial position.  I keep driving my old car because it does what it is supposed to do; it is cheap to run and all the time I hold off buying a new car, I accumulate real wealth (or do not sink myself deeper into debt). Either is a good thing.

Celebrate real wealth. What would you rather do? Give the appearance of wealth, or have wealth? One of the best life lessons I have learned from my journey to become debt free is that consumerism is not all it is cracked up to be, and I have disconnected myself from that lifestyle completely.

I appreciate what I have already, and use it to the best of its ability. Yes I would like an iPhone, and if someone offered me one for free I would take it as there is no denying – it is good technology. But I do not desire one, and I certainly will not be buying one even after I am debt free. Why? Because I do not need it. Yes it would increase my friends’ perception of me and my financial position, but I do not care what others think of my financial position. I would rather know that I am financially secure, than give out that appearance.

Beware the power of advertising. For our entire lives up to this point and beyond, we have been and will continue to be barraged by media advertising anything and everything, and all saying that “your life will be better with Product X” or the fact that “the 2009 Product X is significantly better than the 2008 Product X and anyone who has not rushed out and upgraded yet is poor, stupid, or a combination thereof”.

One prime example is L’Oréal: “Because you’re worth it”. Really? If I do not buy this product then someone else is worth more than me?

You may think I jest, but the next time you see advertising of any sort, disconnect, step back, and really analyse what it is saying about whatever is being promoted. Once you start to see through this, your consumerist nature diminishes and you find more money appearing in your bank account at the end of each month.

Less is more. I am happier now than I have ever been at any point in my life. That is despite the fact I am getting divorced, despite the fact I am in debt, and despite the fact I acknowledge my job is potentially at risk. Why? Because I have got off the carousel of consumer debt accumulation and started to appreciate what I do have. I have my health, I have family and friends, and I make what things I do buy work that much harder for me. These days I am much more content with a library book or a DVD from my LoveFilm subscription than if I went and splashed out on a DVD boxset every week.

Some people are naturally frugal courtesy of their upbringing. I was a spoiled child if I am honest, and I paid for that later on in life by believing I could still have everything I wanted now, even though it was not supported by my income. When I was married the situation just became even worse.

If this sounds like you, and the reason you got into debt was simply spending more than you earn courtesy of consumerist desires, you can undo that. It is possible to change; I am living proof of that.

Of course this does not take into account the other reasons of being in debt. Sometimes, you are just down on your luck and circumstances conspire against you at the worst possible moments. Only you can decide which one is really the reason you are in debt if you are.

Identify your own reasons, spell them out, and work on changing your lifestyle accordingly. Providing you live by a simple mantra, debt will never be a problem again:

Live according to your means, not up to your expectations.

This is part 3 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can catch up on Part 2 by clicking here, or view every post in this series by clicking here.

So far we’ve found out exactly what we owe, and hopefully freed up some extra cash. The next step is to begin actually paying off our debts as quickly as we can. This isn’t pretty if you want to do it quickly like I am, but if you’ve no real urgency and can handle being in debt for longer, then pace yourself. Just remember that the longer you take, the more it costs you in interest.

Reverse Snowballs, Avalanches and Snowflakes

No I haven’t gone mad, and Christmas hasn’t come early! Not in that sense, anyway.

Reverse Snowballing (aka Avalanching) is a method of debt repayment, and one that makes the most sense as you’ll see below. Snowflaking is a term for making micro-payments on top of what you’d planned if you find extra cash that you didn’t calculate having.

Consider this: If you find a fiver in the street, what is a better use of it? Buying you and your mate a Starbucks, or sending it to Barclaycard? Ultimately only you can decide what you’d rather do with it but I’d send it in as a snowflake on top of my snowball.

Time to Reverse Snowball

Continuing my imaginary friend example from Step 2, Selina has decided she has made all the changes she is willing to make in her life in terms of cracking her debt problem.

Her situation was not all that dire, and simple changes were sufficient to see her out of her spiral and into positive balance each month. You (and I) may need to make bigger sacrifices if we’re to dig ourselves out of our respective holes. Perhaps you’re luckier than Selina and I and your debt situation is smaller or less expensive. Either way, it’s fair to say that life would be more fun with no debt.

As a quick reminder, Selina made £480 from decluttering, and had £222 spare each month after paying all her bills and making the minimum debt repayments all round.

Step 1: Order Your Debts From Most Expensive Downwards

There are several thoughts on this but the bottom line is paying off your most expensive debts first, saves you cash in the long run. In Selina’s case her most expensive debt is her second credit card, charging her 27.9% on her £1,000 balance. Her other card followed with its £5,000 balance at 14.9%, and then finally her mortgage at 4%.

In Avalanching (or Reverse Snowballing), you pay off the most expensive debt first, then the next, then the next, trying to cut how much you give away in interest payments. In a traditional snowball, she’d by chance still pay off the £1,000 balance first, as it’s the smallest but if the interest rates were reversed in our example and she followed the traditional snowball method, she’d be keeping the more expensive debt hanging around while she concentrated on paying off the smaller balance.

While this feels good emotionally (it’s always good to see the back of a debt, and attacking the smaller one makes it happen quicker), it doesn’t make money sense. If you’re interested in the raw numbers of why, Trent @ The Simple Dollar worked it all out already with examples.

If you’re not all that interested in the why of the method, just order your debts from highest APR to lowest, and pay off the highest first. It’ll save you lots of money!

Step 2: Discount Your Mortgage

If you are not in arrears, then don’t count your mortgage. It’ll be the cheapest line of credit you have anyway, even though it (hopefully) has the largest balance outstanding. Mortgage Freedom comes long after Unsecured Debt Freedom.

Step 3: Throw Snowballs, From Top to Bottom

Once you’ve ordered your debts from highest APR to lowest, start paying off the most costly debt first. Selina paid £480 to Credit Card 2  in one go from the sale of her clutter, and then £222 every month on top of the minimum payment. With a couple of snowflakes she found in her budget, she paid the card off in just 2 months.

Her next card would take longer, but she also had an extra £50 a month to pay it off with as she was no longer making any payments to Credit Card 2 because it has a £0.00 balance.

This is where the reverse snowball analogy comes in, for those who were still wondering if I had lost my mind completely. As the snowball continues to roll down the hill (this is you paying off your debt), it gets bigger and bigger as it goes. It’s the same for your debt repayments: As you clear debts, your ability to make bigger and bigger payments increases.

Thanks to her snowball and some snowflakes, she cleared this card in just under a year.

The Power of Snowflakes

Don’t underestimate the power of making many small payments to your currently attacked debt. If you manage to find a spare £5 every two weeks, then you’ll have paid off an extra £130 on top of your other big payments each year.

Selina is now debt free – and you can be too!

Selina’s example is quite simple in terms of how many debts she had and how much she owed. But it serves as a great example as to how it is possible to get out of debt, and how quickly. It just takes dedication, time and belief in yourself.

Next week I’ll be looking into the reasons we end up in debt in the first place and how you can combat them.

Have you snowballed? Did reverse snowballing make more sense to you? How are you currently getting out of debt if you’ve already started on another method?