June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
So you have some debt that you're sick and tired of paying for and you have made THE DECISION to get out of debt as fast as you can. But of course, you need to do more than make a decision to get out of debt; you need a plan. So where do you start?
List your Income and Track Expenses
Many people don't know how much they can commit to paying each month on debt because they don't know where their money goes each month. Track your expenses for three months and place them into one of the following categories:
- Needs: Necessary expenses such as housing, health care, utilities, and groceries.
- Wants: Optional expenses such as entertainment, vacation travel, dining out, and magazine subscriptions.
You'll find it easier to reduce your expenses once you know where the money is going. Look for ways you can cut back on your wants. Most of us can do this without making dramatic changes that compromise our happiness or quality of life. The goal is to sacrifice some small things today so you can pay off your debts and achieve more important goals in the future--like buying a home, sending your children to college, or retiring early.
Pay More than the Minimum on Your Debt
Once you've set a budget and cut unnecessary expenses, you need to develop a debt repayment plan so you can get out of debt faster.
Most people have no idea how long they will be in debt if they just make the minimum monthly payment on their credit cards. Let's say you have three credit cards with a total balances of $10,000 as listed below.
|Balance||Minimum Monthly Payment||Interest Rate||# Years Until Credit Card is Paid Off|
|Credit Card 1||$4,200||$53||15%||31|
|Credit Card 2||$2,100||$42||19%||8|
|Credit Card 3||$3,700||$40||11%||17|
If you make only the minimum monthly payment every month on all three cards, it would take 31 years to be debt free. And the total payments would cost you $32,408!
Instead, try paying a little extra each month on the card with the highest interest rate. When that card is paid off, apply those payments to the card with the next highest interest rate. If you followed this strategy and paid only $25 more per month, you could be debt free in less than 10 years. And you would save over $14,000 in total payments!
Another place you can find money to pay down your debt is through your tax withholding. If you normally get a tax refund, you can adjust your withholding so that less is taken out of each paycheck. This way you are getting that refund in each paycheck instead of in April, and can use it on debt.
Consider Other Strategies to Reduce Your Debt
You should also consider the following strategies to get out of debt sooner:
- Pay with cash. When you want something and are tempted to pull out your "plastic", think for a moment of what the true cost will be. Interest alone could make that purchase price easily double! By paying cash you accomplish two things. 1) You pay what is on the price tag NOT additional interest charges and 2) you keep yourself out of debt.
- Exchange high interest rate for lower rates. A quick way to get out of debt sooner is by lowering the current rates you are paying. If you own your home you can tap into the equity of your home and use a home equity line of credit which generally has lower rates than credit cards and you may get a tax deduction on the interest you pay.
- A balance transfer offers you the ability to transfer an existing credit card balance to a different card which has a lower interest rate. Make sure that the interest rate of the card you are transferring to will not rise sharply in the near future.
- Call your lender and ask for a lower rate. You may be surprised at how often a company will work with you in order to keep your business. And if the company says no, you're no worse off.
Stick to your plan
It's hard work getting out of debt. But if you stick to your plan you can get there. Once you are there, do yourself a favor and buy the things you want with cash. If you're not paying interest to a creditor, you'll ultimately have more money to use on the things you really want out of life.