Resolve to pay down your debt in 2007

I’ve learned the hard way that although New Year’s resolutions can be a great way to make a fresh start, if you set unrealistic goals they’ll likely fizzle out after a few months. Sometimes small steps are the answer, building momentum as you go.

Not surprisingly, the number one resolution for many people is paying off debt. Unfortunately, without the willpower to stop accruing new debt while paying off the old, this effort can fail. If you’re determined to clear up debt and can set responsible spending habits, these approaches just might work for you:

Make a budget and stick to it. This is the best thing you can do to control your finances, but it’s hard to do alone. Money magazine’s Web site, https://money.cnn.com/pf/money-essentials/, contains a detailed overview for setting financial goals. And Practical Money Skills for Life (www.practicalmoneyskills.com/budgeting), a free personal financial management site sponsored by Visa Inc., features a guide to creating a budget you can live with, along with interactive budgeting tools.

Targeted payoffs. If you owe money on several accounts, list all outstanding balances and their corresponding interest rates. Each month, pay the minimum amount due on each account except for the one with the highest rate. Pay as much as you possibly can on that account until it’s paid off, then move to the next-highest-interest loan, and so on. This is the only time you should ever pay the minimum due, because that can add years to payoff times. But your sense of accomplishment at paying off accounts one by one may inspire you to kick it up a notch. Just be sure to retire those higher-rate cards and only use them for true emergencies; otherwise, you’ll be back where you started.

Consolidate debt. Sometimes it makes sense to open a new credit card with a very low interest rate to pay off other cards. Carefully examine all the terms, however: Low rates sometimes skyrocket after an introductory period and additional fees can drive up overall costs.

Tap savings. Most experts recommend keeping three- to six-months’ pay in easily accessible savings accounts or short-term CDs for emergencies. But, if you’ve saved more than that, you could be losing money in the long run. Say you have $10,000 in savings earning 3 percent interest, but have $5,000 in credit card debt at 18 percent. You’re paying six times as much in interest as you’re earning – plus, interest earnings are taxable. Caution: Only try this if you absolutely won’t use it as an excuse to rack up new debt – you worked hard to save that money. And don’t close out a CD early for this purpose – you’ll pay a penalty that will void possible debt savings.

Home equity loans/lines of credit. In recent years, many people have used these tools to consolidate debt because they offer lower interest rates than credit cards and interest may be an income tax write off. However, recent downturns in the housing market and interest rate increases make this a riskier strategy, so check with a financial advisor before pursuing.

Resolutions are never easy – if they were, we’d already be doing them. But the long run, paying off debt and getting a fresh start is well worth the effort.