A big obstacle to your financial independence could be too much debt. If too much of your budget goes to debt service, it leaves very little for the things you want, or investing for the future.

So that debt does not become a way of life, start to methodically track your monthly income and expenses. It’s especially important to figure out exactly where the money is going. People with financial problems often find that hundreds of dollars disappear into a void each month paying for things like snacks, lottery tickets, entertainment and magazines. Once you’ve tracked your expenses, you can figure out what is unnecessary. The goal is to cut expenses until you earn more than you spend.

You can then put your repayment plan into effect by listing all debts and rank the accounts from highest interest rate to lowest. Then pay as much as you can on the account at the top of the list (the debt with the highest interest rate). The idea is to retire that debt as quickly as you can while making minimum payments on your other debts. After that, when the debt at the top of the list is paid off, use the cash that is freed up to hammer at the next account on the list, and so on.

The first target - those double-digit credit cards.

If you’ve got credit cards, at 16-18 % interest, or even 28% interest if they’re department store credit cards, the best thing to do is look at alternate credit sources, as a line of credit can easily be arranged at 6-10% to replace that high interest-rate debt. That makes it easier and more manageable to pay off in the short term.

To keep up your resolve, post an affirmation where you can read it every day. The bathroom mirror is a good spot. Keep the message short and simple, that by living frugally, you can be debt-free by, say, the end of the year.

Debt consultants may not suggest this, but another way is to consolidate your credit cards into one big loan. This can be done by taking out a lower rate credit card, or refinancing your mortgage for much higher than you already owe and pocketing the difference. The problem is that most folks in debt don’t possess that self-discipline and soon resume their free-spending ways and end up charging their credit cards, even as they’re paying off the debt they’ve consolidated.

Not getting a handle on your debts puts would-be investment dollars in the hands of the banks and loan brokers, and out of your hands, where it more rightfully belongs. Find out how you can manage your debts. Start by contacting your personal financial advisor to discuss your future financial goals.

Reprinted by permission of AIC Limited. Copyright 2004

April 9, 2008