Becoming debt free is not as elusive as the American media would have everyone believe. The down spiral of the economy has made paying off debt more difficult for individuals and families, but not impossible. The same principles apply, no matter what your financial situation. By following the 7 steps below, you can ensure that you will pay off your debt and regain your financial freedom.
- Make a Budget – Before you can pay off debt, you must know how much money you actually have to pay each pay period. There are numerous tools and spreadsheets online that will allow you to tailor make your own budget according to your particular needs. Include all of your expenses, including variable expenses like entertainment, vacations, etc.
- Make a Debt Spreadsheet – This task is not as daunting as it sounds, and once it is done, you won’t have to do it again. Compile a spreadsheet off all your debts, including what they are for, company, interest rates, minimum payments and any other relevant information you might need.
- Consolidate Your Debt – consolidate as much of your debt as you can to the lowest interest credit card. This can save you thousands of dollars down the road. If your credit is good, accept a credit card offer at 0% interest and transfer the balance of a high interest credit card to it. Be careful of introductory periods, though. Once they are over, the card interest rate may be higher than what you were paying originally. Get the facts before doing anything final.
- The Snowball Method – This method is the most affective for paying off debt while paying the least amount of interest. Consult a debt payoff calculator to accurately gage which debts should be paid off in what order. For example, sometimes more interest can be saved by paying off the highest interest rate card first. Conversely, a card with the largest/smallest balance may actually need to be paid off first to decrease the amount of interest accrued. When you have a plan, go back to your spreadsheet and number each card in the order it will be paid off. Now you will create a debt payoff schedule.
- Focus on One Card at a Time – According to the snowflake method, you should pay the minimum payment on all cards except for the card to be paid off. For this card, you will pay the minimum, plus and additional amount that should be at least equal to the minimum payment amount. Consult your budget’s variable expenses if you do not have enough income going towards your debt. Reduce any expenditures that are not necessary and put that money towards the first card. Continue until card is paid off.
- Maintain the same payment for every card – Once the first card is paid off, continue the same payment method with the second card. Pay the same amount that you did on the first card, even if the minimum payment is lower. This will increase the speed in which you pay down your debt.
- Stay Focused and Organized – The only way this method will not work is if you lose track of your budget and fall behind on payments. Paying off debt requires patience, perseverance, and organization. Stay the course, and you will be shocked at how easy it was when you are done.
After your cards are all paid off, cut them up and don’t use them again! Credit cards should be used for emergencies only, so if you must keep one, make sure it is one with the lowest interest rate. Don’t close any cards immediately, either. This could affect your credit negatively by lowering the amount of your available credit. Instead, contact your credit card companies and ask for a lower interest rate. They may say no, but if you have paid all your payments on time and are in good standing, they might surprise you. Finally, start a savings account and contribute the money you applied to credit card bills to it. When you have an emergency or need to make a large purchase, you then can use cash instead of credit. Then pat yourself on the back, because you are debt free!