Say you're screaming in pain because someone clipped an alligator clamp to your ear and it really hurts. There's a problem here. There's a conflict between how the world is and how you want it to be. The best solution is just to take the damn clamp off your ear. No more damage to your ear, the pain is gone, and you're a happy camper. (level 0)
However, we can't always have such a nice solution. Say you trip and kick the ground so hard that your foot balloons up and everyone thinks it's broken. Now you're sitting there having a hard time functioning normally because of the pain. There's a problem here too. Only this time, we can't have the same kind of 'solution' as before. There's no easy way to undo the damage. That doesn't mean we just have to sit there suffering though. We can accept that our foot is messed up and that we're doing everything we can to get it all healed up. It'll still take weeks/months to be 100% healed, but we can nearly instantly get rid of that suffering. Instead of resolving the reality/ideal conflict by changing reality, we change our unrealistic ideal of sitting there with a working foot and not experiencing pain. This is still a pretty good solution. It's as good as you can do given the situation and there are no internal conflicts - simply a situation that isn't as awesome as it used to be. Despite the sensations of pain, they're just not bothersome and you can be completely comfortable. Your work here is done. (level 1)
Going one step more complicated, say you have to give a speech in front of a bunch of people. Quite naturally, you don't want to look like an idiot. Of course, it'd be nice if we could just do this without risking looking like an idiot (level 0 solution). If we don't have this, we might start freaking out because of the reality/ideal mismatch of "I might look like an idiot/I can't look like an idiot!". Our hearts will race and we will sweat as we pour over the worst case scenarios, perhaps self-fulfilling that prophecy. Speaking of self fulfilling, anxiety is bad and will cause me to look bad! Reality/ideal mismatch of "I'm freaking out, but I need to be calm and confident" (level 2). So now we're in deep poo and so we decide to talk to our hypnotist buddy.
Our hypnotist buddy decides that he can't fix our problem on level 1 because of this level 2 shit getting in the way. So he attacks the problem there, and is successful. With our ideal shifted to match reality, it now seems okay that we have performance anxiety. Not good, mind you. We haven't given up, but we can come to the table ready to do something about it. Okay, I have performance anxiety. How do you resolve that?
This is an interesting point. At this point, you can feel peaceful as you're not caught in an inner conflict. You still have performance anxiety. Yet... it's somehow better than when you were caught up in the reality/ideal mismatch of "I might look stupid but I must look smart!". Even though you have the same problems, you're on the right track. You're on the right track because you can look at whatever problems you have and begin solving them. At this point, you can look at it and notice "I was trying to push myself to give the speech before I was ready. I hadn't considered whether that risk was worth taking, because I felt like I didn't have a choice - so I tried to push out thoughts of failure. Yet I obviously knew that I was missing something potentially important, which is why it kept bugging me". After that realization, it's not far to wonder "So... am I ready? Is the risk of looking stupid worth it?". And once you open your mind to that question - letting the feelings of the costs and benefits enter at the same time, you can "collapse the anchors". Your decision will feel congruent, whichever way you decide. You might decide that you need a level 0 solution. Looking stupid isn't acceptable, so you'll put more work into preparing. Or maybe you'll decide that it's worth tolerating a level 1 solution. "I might look stupid, and I can accept that risk". Maybe you'll walk in with no risk of looking stupid. Maybe you're risking it. Either way, our work is done, and your heart rate isn't elevated.
You could take it even further. People generally don't like that they have anxiety about their anxiety. Now you're 3 levels up. But if you get to the point where you are okay with the fact that you have anxiety about your anxiety induced anxiety, then you're in a very similar position as described above - just one level up.
Whenever you're at this position 'above' all your problems, so that you can say "and I'm okay with that" to even the highest level problem, you're in a position to get to work. Sometimes you'll choose to work down to level 0 and fix reality. Other times you have to accept reality at level 1. Other times you might get in a weird position to be accepting a level 2+ solution - that is, accepting that you have internal conflicts, and given the situation, you want it this way. Perhaps it's just an issue of opportunity cost. That might look like: "I'll get to it after I turn in this report, but for now I have anxiety and I'm okay with that. I can laugh at myself while I have this panic attack". Or perhaps you're a comedian and it's your job to have internal conflicts and be okay with that so you can be funny (either by making fun of yourself or just acting humorously immature without being mean spirited). Or perhaps your phobia is of penguins wearing pajamas, and you come across it so rarely that it isn't worth the effort to fix - you have internal conflicts, but you don't have to spend time in them or avoid them, so no harm no foul.
Of these, the "not worth addressing yet" is the interesting one. As a person that isn't level 1 perfect (i.e. not level 0 bullet-proof superman, but "enlightened zen master"), I think the first goal should be to get to level something perfect - to not have any significant issues which you aren't okay with at some level. Comedians often seem to be fairly solid on a fairly high level - they have plenty of problems, but they can laugh about them all. Effectively solving them is an entirely different issue. If you're level something perfect, then you have no buttons to push. If you're afraid of butterflies, but okay with that, then when someone teases you about it, you laugh. If you're not okay with your fear of butterflies, but you're okay with that, then when you're teased, you might respond in a hostile-like manner, but in a self aware and playful way "Fuck you man! those things are scary!" (while laughing).
When you get things solved on some level, you're able to look down on things and at least try to monitor and guide your path. From there it's just a matter of climbing down that ladder until you have better things to do.