5 Simple Steps to Making Your “Get Out Of Debt” Resolution Stick - Part 4
Welcome back. It’s January 10 as I write this, almost half-way through the month already! I hope you’re sticking with your New Years resolutions, particularly if one of them was to get your debt paid off.
If you’ve been following along with the series so far, you’ll have a plan for paying off your debt. You’ll know just how much debt you actually owe, and you’ll hopefully have examined where you’re spending your money and found some leaks that you can plug.
In today’s step we’re going to look at how to use that extra money that you’ve “found” in your expense list. So let’s get started…
First of all, I’ll point out that the basis of this step is that you’re making at least the minimum payments on all your debts, and staying current on any regular payments you make like a mortgage or car payment.
While you’re paying off your debt, you always want to make sure that you stay up-to-date on your payments. Missing a payment or even making a late payment can have some significant consequences, beyond the obvious things like facing foreclosure on your home or repossession of your car.
A lot of credit card agreements have clauses that let the credit card company raise your interest rate and charge you a late fee if a payment is late or missed. In many cases, these interest rates can be as high as 30%!
So even if you have a low-interest credit card now, if you miss a payment or it’s a day late, the rate could skyrocket. So you always want to make sure you make your minimum payments on everything.
Once you have your minimum payments covered, you’re going to take whatever extra money you can manage to pay down debt and you’re going to focus it on one debt at a time.
eg. If you have an extra $150 to pay down debt, you’re going to pay it all towards one single debt - not split it up between more than one.
Splitting it up between multiple debts might seem like you’re making more progress, since more than one debt is getting reduced, the fact is you’re not getting the most “bang for your buck.”
But how do you choose which debt to pay off first?
There are two schools of thought on this question. On one hand, paying off the debt with the highest interest rate first will mean you pay less interest overall. But on the other hand, paying off the debt with the lowest total balance first means you’ll see results (debts being paid off) faster.
Which one you choose is up to you, and will depend on what motivates you.
Would you rather save money on interest or would you rather see progress faster?
The fact is, for most people the highest interest rate debt won’t be the one with the lowest balance, so you’ll have to choose which way to do it. Personally, I like the idea of paying off the lowest balance first and knocking those debts off your list faster.
Just realize that this isn’t the cheapest way to do it and you will pay more interest while you’re getting out of debt.
Once you have the first debt paid off, whether it’s the highest rate or the lowest balance, move on to the next one on the list (new highest rate or new lowest balance). Take the money that you were paying on the first debt and add it to the minimum payment you’ve been making on the next debt.
eg. If you were paying $150 towards the first debt and the minimum payment on the second was $30, you’ll now be paying $180 toward the next debt.
Once it’s paid off, you continue to roll the payments into the next debt until they are all paid off.
Just how long this will take is going to depend on how much debt you have and how much you can afford to pay, but by doing this you’ll be debt free a lot sooner than taking a “scattergun” approach to paying things off.
In the next step, we’ll discuss how you can keep from getting knocked off course when unexpected expenses come up while you’re in the middle of your get-out-of-debt plan (and they will come up whether you like it or not). Step 5 will be posted in the next couple of days, so stay tuned.
In case you’re coming into this series in the middle, here are the links to the rest of the steps:
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