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Ditching your debt

As tempting as it might sound, this blog is not about how to change your name and move to another country.  It is about getting a handle on your debts and getting rid of them.  Now why would you want to live in a world where you know how much you owe?  Because it’s easier to sleep at night when you know you’ve got something covered.  Again I look to Suze Orman for inspiration.

  1. Remove your credit cards from your wallet and put them in the freezer, preferably in individual giant ice cubes.  You may want to keep one for emergencies but emergency means emergency, not sushi.
  2. Gather up all your debt information.  This is usually going to include your credit card statements and that money your brother loaned you but probably isn’t going to include your car and your mortgage.
  3. Put your debts in order.  You can choose either to put them in order of smallest balance first (self-esteem method) or higher interest rate first (financially intelligent method).  With either method your debts are getting paid off so choose the one that’s going to work for your personality (do you need encouragement?  do you want to save a few bucks?).
  4. Using your budget, determine what’s the most you can pay toward your debts.  This is probably going to hurt a bit but it’s like a band-aid, stings coming off but then it feels so much better.
  5. Write out the minimum payment amount for each card plus $10.00.  Never just pay the minimum balance or the only thing your children will inherit will be bills.
  6. Add these numbers up (minimum payment for bill A + $10 plus minimum payment for bill B + $10.00 plus etc. etc. etc.), then determine the difference between that amount and the maximum amount you can put towards your debts.
  7. If the sum of your minimum payments + $10.00 is more than the maximum amount you can put toward your debts, go back to your budget and see what you can reasonably decrease to help pay off your debts.
  8. If the sum of your minimum payments + $10.00 is less than the maximum amount you can put toward your debts, you’re going to apply this difference to the debt that’s first in line.  Pay the remaining debts as minimum payment plus $10.00.
  9. When the Debt 1 is paid off, roll the money used to pay Debt 1 into the Debt 2.  When Debt 2 is paid off, roll that money into Debt 3.  So on and so forth until all debts are paid.  Overly simplified example is at the bottom of this blog.

Bonus points:  Create a spreadsheet to manage payment schedules and give you an idea of when specific debts will be paid off.  Tomorrow I’ll tell you what we’re going to do with that fabulous money once your bills are paid off and it has nothing to do with shoes.

Overly simplified example:

Debt 1 = $500.00, minimum payment of $50.00 + $10.00 + $170.00.  Total repayment per month = $230.00 until paid.  This money now shifts to Debt 2.

Debt 2 = $1000.00, minimum payment of $100.00 + $10.00 + $230.00.  Total repayment per month = $340.00 until paid.  This money now shifts to Debt 3.

Debt 3 = $1500.00, minimum payment of $150.00 + $10.00 + $340.00.  Total repayment per months = $500.00 until paid.

Total minimum payments plus $10.00 = $330.00

Maximum able to pay per budget = $500.00

Difference between minimum payment and maximum ability to pay = $170.00

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