The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
Are you tired of paying credit card bills for things you no longer own? Do you wish you had an extra $200 in spending cash rather than a car payment? Does it depress you to think you might be among the people who end up dying in debt?
It doesn’t have to be that way. 2015 can be the year you climb out of the debt hole.
Money Talks News finance expert Stacy Johnson has a simple three-step process to make it happen.
You can use an Excel spreadsheet, a typewriter or good ol’ pen and paper. Heck, use a glitter marker, for all we care.
However you do it, you need to write down each and every debt you owe along with its minimum payment and interest rate. If you have a credit card with a promotional rate or a mortgage with an adjustable rate, make a note of when those will change.
Your list should include all of the following, if you have them:
Once you have all the debts written down, total them up. That number may have you thinking either OMG, or “Hey, that’s not too bad.”
Regardless of your reaction, now it’s time to bring that number down to zero.
This is much easier than it sounds. While you can use calculators and spreadsheets, there’s no reason to get that involved, unless you really dig that sort of thing.
If you’re not a budget geek, you can instantly create a debt repayment plan by going back through your list (you know, the one you created in Step 1) and numbering the debts in the order you’d like them gone.
There are two theories when it comes to ordering debts.
My personal preference is theory No. 2, although if I had a debt with a significantly higher interest rate than everything else, I might consider paying that one off first.
Then there are all sorts of nuances you can add into your calculations if you want. For instance, if I had a credit card and a vehicle loan with similar interest rates, I would pay off the unsecured credit card first. For cards with promotional rates about to expire, I might move those up to the top of the repayment list. Finally, I would leave the mortgage for last because I itemize my federal tax deductions and can deduct the mortgage interest.
Now you need to put your plan into action. This involves something we call pyramiding. You may see others use the terms snowball or avalanche. Essentially, it’s focusing all your money on one debt and then building upon minimum payments as you knock out your balances.
Go back to your list and review all the minimum payments due on your debts. Now compare those amounts with the numbers in your budget. If you’re paying more than the minimums, you need to reduce payments on all your debts except whatever is No. 1 on your list.
For example, let’s say all your debt is on three credit cards. Each has a $25 minimum payment, but you’ve been paying $100 each month on each one. To start your pyramid, drop the payment on each of two cards to $25 and add the remaining $75 from each card to the third card’s payment. As a result, you’ll make $25 minimum payments on two cards and one $250 payment ($100+$75+$75) on the last card.
When that last card is paid off, take the $250 and add it to the second card on your list. Now, you’re making one $275 payment and one $25 payment. When card No. 2 is paid off, combine the $275 with the $25 minimum you’ve been paying and make $300 payments until you finish off your debt.
So why bother with the pyramid? If you’re going to be paying $300 in debt payments every month, does it really matter how you structure the payments?
Money-wise, depending on your balances and interest rates, it might not make a huge difference how you structure your payments. The real benefit of pyramiding is psychological. It gives you a game plan to follow and helps you see results more quickly. Rather than spending years paying small amounts without much obvious progress, you’re heaping all your money on a single debt and watching it disappear.
The secret to making this system work is to look for any and all extra cash you can redirect to your debt. Adding a couple hundred dollars to your payments each month will have you zooming through your debt repayment plan in no time.
And that brings us to our final point.
You may be looking at the headline of this article and thinking there’s no way you could possibly pay off $10,000 in debt this year. After all, you’re barely making ends meet as it is, right?
True, if you live on a $20,000 income, you’re probably not going to be able to pay off $10,000 without breaking a sweat. However, for many middle-class families, it’s probably doable.
Let’s look at the numbers.
To pay off $10,000 in debt, you need to pay off about $833 a month, and you’re probably already paying a big chunk of that. Go back to your budget and add up all your current debt payments. How much does that equal?
Granted, some of that money is going to interest, but you’re paying down the principal (your debt) as well. Pull up your account statements to learn exactly how much of your monthly payment goes to principal and how much is being eaten by interest.
Then subtract the total of your current monthly principal payments from $833. For example, if you’re currently paying $333 toward your principal each month, you’d need to come up with an extra $500 each month to reach $10,000 for the year.
There are a number of ways you could do that.
Between saving money and earning money, there are plenty of ways to come up with an extra $500 a month to put toward your debt pyramid and hit a $10,000 payoff for 2015. While some ideas require work on your end, others are practically effortless.
This post originally appeared on Money Talks News.
More from Money Talks News:
Image: iStock
May 30, 2023
Managing Debt
September 7, 2021
Managing Debt
December 23, 2020
Managing Debt