There is actually a method to efficiently get rid of debt and becoming debt free. This is sometimes referred to as debt snowballing. Some people go as far as to even charge for this information, thus taking advantage of debt burdened people. However, here is the simple plan absolutely free!
Some people, like Dave Ramsey, suggest that you pay the debt with the smallest balance first. Although this is great to give you hope and let you feel that you accomplished a task by having one less creditor, it is not the most efficient way to pay off your debts.
First, start with a discretionary amount of money to be applied to paying off your debt each month, even if only $100. That’s less than $4 per day. I’m sure that you could find some sort of odd job or even an additional part time job to get this discretionary money to use each month. This can even be accomplished by changing your habits, such as giving up that Starbucks coffee every morning. The more discretionary money you set aside each month, the faster you get your debts paid off.
Order your debts by descending intersest rate, thus you will paying off the debt with the highst interest rate first. This saves you from having to pay extra money in interest.
Pay the minimum on each debt and apply the discretionary money toward the first debt with the highest interest rate. Once that debt is paid off, you will rollover the minimum amount that you were paying on it in addition to the discretionary money and apply it to debt number two. Continue down the list to the next-highest creditor and repeat this process until your debts are gone.
For example, let’s use the following scenario:
Scenario: $100 per month of discretionary money to be applied ONLY to paying off debts.
$3,587 balance at 19.99% on Credit Card #1 with a minimum amount of $75
$2,478 balance at 14.50% on Credit Card #2 with a minimum amount of $50
$19,625 balance at 12.80% on Credit Card #3 with a monthly payment of $600
$150,000 balance at 6.00% on a 30-year mortgage with a monthly payment of $900
Month 1: Pay minimum amount on all debts + $100 on debt #1
Month 19: Debt #1 is now paid off. Pay minimum amount on all debts + $175 on debt #2
Month 25: Debt #2 is now paid off. Pay minimum amount on all debts +$225 on debt #3
Month 31: Debt #3 is now paid off. Pay minimum amount on all debts +$825 on debt #4
Month 140: Debt #4 is now paid off.
All debts excluding the mortage were paid off in about 2 1/2 years!
All debts including the 30-year mortgage were able to be paid off in less than 12 years!
Increasing the monthly discretionary amount to be used will get your debts paid off faster.
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