Now that we have talked about keeping a 30 day spending record and started looking at ways to cut spending, it is time to talk about how to pay off those pesky debts.
Most people have a set amount that they pay toward their debts every month. For many people, this is the minimum payment.
If you have decided that you want to get out from under your debt, this system will not get you there – at least, not any time soon.
You need a plan of attack.
First, gather all of your statements for your non-mortgage debts. This includes credit cards, car loans, and any other consumer debt you have.
Make a list of the total balance, minimum monthly payment and interest rate for each. A computer spreadsheet program works well for this.
Next, you need to decide your plan of attack.
What you are going to do is pay the minimum on all of the debts except one. For that one, you will use all of the extra money you can find in your budget to pay down that debt until it is paid off. (This is why the last two posts in this series were about how to save money.)
Once that debt is paid off, you will apply the money you had budgeted for that account to the next debt in your list. And so on, until you are debt free!
The most money-sensible way to approach this is to pay off the account with the largest interest first. This will save you more money in the long run.
But as I have said before, with any sensible money management plan it is important to know yourself!
Sometimes the best thing to do is to pay off the account with the lowest balance first, so you can experience your first victory sooner. That might be the boost you need to keep bringing your own lunch to work and going without your daily latte.
It is a good feeling when you get that loan or credit card statement with a $0 balance on it!
Figure out the strategy that is going to work best for you. After all, this is your personal financial plan and you are the one who has to live with it.
Wikipedia has a great entry on debt-snowballing (the method I just described) with some examples.
You can be debt free!
“And the borrower is servant to the lender.” (from Proverbs 22:7)
Visit the “Personal Finance” category to read all of the posts in this series.
As promised last week, here is a link to another grocery saving tip from All Things Hold Together (my other blog): Saving Money With Coupons
March 7th, 2008 at 10:02 am
Excellent post and you hit the nail right on the head. I’ve seen far too many people get bored with clearing high balances with lower rates. My fellow debt professionals say “But it makes the most sense?” But for who.
The early thrill of watching some creditors vanish gives people the emotional support to see that their sacrifices are making a difference. Besides, a minimum payment freed up to apply elsewhere can go further than yet just a bit more on a high interest debt.
Just like getting into debt, getting out of debt requires you to be aware of why you are making the choices you are. Knowing what motivates you is critical to developing a good approach that fits and feels comfortable for you.