I started to look at different financial, debt reduction and frugal sites to see what else is out there. There is a wide range of sites. I might list a few that keep my interest. I found that most repeated the same sets of steps to reduce your debt.
- Stop incurring debt [cut up your cards*]
- List your debts with interest rates, balances & min Payments
- Order your list [By balance and/or interest rate]
- Start paying your #1 debt with a vengence
- After the first one is paid, use the snowball affect with the next on your list
- Wash, rinse, repeat.
The list gives you a few options. If you’re handy with Excel you could play around with the numbers to give you the best benefit. In my experience if you tinker with it, you still come within a few months of freedom. This is how I have chosen to attack it.
The Devil is in the details
Step 1 – Easy yes? Maybe. For me, I have 2 small reoccurring charges on my main card and eventually I will move even those to debt card. The other 2 cards I have are “closed” and under payment plans.
Step 2 – I believe this one is a no brainer. All your debts. Not your utilities/bills, your debts. Be sure to add the payments and balance out so you know your beginning damage.
Step 3 – This is where variables start in. You can list your debts in order of balance, interest rates, payments or a combination. For example, the debts which are in collections are all at 12%. My debt with the IRS is currently at 4%. Paying off the IRS is more important to me so it will probably be listed much higher on the list than a medical debt that will just sit there until paid off. This order can be changed around to suit your needs or what benefits you the most.
Step 4 – Which ever debt you’ve put on the top is where any extra money you have will go. Rebate check? Debt #1. Tax return? Debt #1. Money you saved by using your espresso machine? Debt #1. Remember, when Debt #1 from your original list is paid off, it will drop OFF your list and the former Debt #2 will become Debt #1.
Step 5 – This is where the magic starts, the Snowball Affect. Once the former Debt #2 becomes Debt #1 you take the payment from the former Debt #1 and apply it to Debt #2.
Repeat until all your debts are paid off.
Other variables that may come into play in the basic senario:
Between the Steps 1 & 2 along with cutting up your cards you may wish to create your emergency cushion. This could be $1000 to 6 months of your pay. The classic question comes up, “Savings only yields .05% and my debt interest is racking up at 12%, why save first?” Here’s the reasoning, if you don’t have a cushion you’ll use your card as your emergency back up plan and incur further debt. I have my reasons for not cutting up my cards, I earn college money for my kids by using the card. I’ve begun to use it for utilities and then pay the amount “off” rounded up to the next 5. So… for example, I pay my cell company $72 on my credit card and then pay the credit card $75 from my banking account. Its a stupid little game I play with myself. I’m sure someone will complain about it and I don’t care.
Variables on Step 3. Some will tell you to list your debts in order of balance, smallest first. Paying off your smallest debt will give you motivation to continue with the plan. Some will tell you to pay off the highest interest balance first. Again, if you’re savvy with a spreadsheet, you can play all you want. Quicken will suggest an order for you. There are a number of applications on the ‘net that can do the calculations for you. Whatever works for you!