My fault, my failure, is not in the passions I have, but in my lack of control of them.”- Jack Kerouac

So now you know the difference between good debt and bad debt, and you’d like to get rid of the bad debt. But if you got into debt in the first place, how are you ever going to have enough money to get out of it?

Unorganized financesThere’s no way around the fact that you need more money for debt reduction. Trust me, playing hide and seek from reality doesn’t make debt go away. I’ve been in debt throughout my twenties for painfully stupid reasons. I didn’t want the responsibilities and hours that come with a higher paying job, nor did I want to cut back on my lifestyle. I preferred to live with my messy financial picture because it seemed easier than fixing it.

I came to the obvious conclusion that I could reduce bad debt if I simply started organizing my finances. Organizing finances is a bit different from budgeting, which I’ll cover next week. By organizing finances, I simply mean taking control of my money. Here’s a simple three-step strategy that worked for me.


Getting serious about debt-reduction required some personal inventory on my part. I found that setting personal goals made organizing finances seem like less of a burden, and it freed up money to pay down my debts.

I was lucky enough to have stumbled upon my long-term personal goal while getting my bike fixed by a shop owner who loved his job. The shop owner seemed so perfectly content, I realized I could be wearing the same smile while at work if I pursued my love of reading and writing in coffee shops by owning and operating a coffee shop myself. The need for start-up capital finally gave me motivation to clean up my finances so that I could start saving money.

It’s likely you’re passionate about something as well: maybe traveling around the world; owning a second house; or maybe something as peaceful as not living paycheck to paycheck. Whatever the case, if you need help picking out some goals, check out the Money 101 Lesson on identifying goals. It’s by far the most informative resource I found.

Unfortunately, I have to take care of other things before I can begin saving start-up capital. Because I neglected my finances for so long, my discretionary income has to go towards reducing bad debt; saving for a house; catching up with retirement savings. I found that prioritizing my goals lends some more structure to my finances. Check out CNNMoney’s Prioritizer to help you rank your list of financial goals.

Analysis of Your Financial Health

One important way I organized my budget to reduce bad debt has been to reduce my debt-to-income ratio. Eric Petersen at explains, “Your debt-to-income ratio is exactly what it sounds like: the amount of debt you have in the form of mortgages, car loans, student loans and credit card debt, as compared to your overall income.”

Essentially, your debt-to-income ratio gives you a picture of how much debt you carry. If more money goes to paying off the debt, you’ll need to organize your finances to bring down those debts accordingly. Otherwise, your debt just keeps growing because you don’t have money for anything else. As Laura Russell explains, “You can be making a lot of money every month, but if you’ve got the debt to match it, that can be a problem…. It’s important not to overextend yourself.”

“In general,” Petersen says, “you’ll want to keep that number below 36 percent — a threshold that loan officers and credit card issuers often use as a factor when they determine how much they’re willing to lend you.”

I played around with’s debt-to-income ratio calculator and was pleased to discover my ratio was only 26%. It good to know that lenders will give me a fairly decent interest rate with this ratio, but that’s not my main interest.

Bankrate’s calculator assumes I’m making minimum payments on my credit cards. I plugged in numbers that reflect my actual monthly recurring debt payments, and my ratio inflates to 42%. I like looking at this ratio because it serves as incentive to cut my ratio back down to under 30%. It also reminds me that I don’t have much discretionary income to spend, so it encourages me to stay within a small budget so as to avoid using credit cards.

It’s not recommended to have such an aggressive strategy if you have a low emergency savings cushion (mine is just enough for one month’s rent), but that’s how I’ve chosen to pay down my debts. has a much better strategy than mine for reducing your debt-to-income ratio.

A Financial Notebook

If I ever lose my financial notebook, I’m in huge trouble. All my account numbers, user names and passwords are listed in this book. Even though it’s risky to keep all this information in one place, it’s a huge help for me.

Each month, I list the bills in a column in the order I receive them. To the right are five columns: Balance; Date Due; Amount Paid; Date Paid; and Balance Remaining.

A huge barrier to paying bills on time was having them scattered everywhere. Now I just have to turn to my notebook, see when a bill is due, and record my payments. It’s so easy and effective that I still smack myself for not having implemented this organization practice earlier.

Perhaps you have some strategies to organize your finances that you’d like to share. I’d love to hear them.