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Home / Debt / 3 Steps To Eliminating All Of Your Debt, Part 3: Execute

 

This is Part 3 in our 3-Part Series:  Eliminating All of Your Debt.  Here are the links to Part 1:  Prepare and Part 2:  Plan.  

Alright, you have three months of cash outlay tracked and you have struggled over your budget. You are nearing the home stretch. After making your personal decision as to which debt to pay off first, you will need to develop a concrete plan on how you are going to eliminate that debt. Here is a suggestion on how to attack your debts one at a time.

Goals

Setting short term and long term goals are often a key to success at work. The same is true when you are trying to eliminate your debt. If you have a mortgage, it is unrealistic to think that you will pay that off in the next year or two. It is equally unrealistic to think that you may pay off thousands of dollars in credit card debt within a few months. Try setting a goal of paying off your credit card debt within 24 months. That would be your short term goal. Your long term goal may be to refi your mortgage to a 15 year note within the next five years. These goals will all be highly personal, so take your time defining them.

Tackle That First Debt

For the sake of this article, let’s assume that you want to get rid of a credit card balance of $5,000 at 15 percent interest. We are assuming that because I would choose to eliminate the debt with the highest interest rate first. A balance of five grand should put your minimum payment in the neighborhood of $200 a month. Be sure to make that payment on time each month or paying your debt down will not have as great an effect on your credit score. Low debt coupled with a late payment history is still a recipe for a low score. After making that payment keep your statement on hand.

Most card issuers allow you to make more than one payment per month. When I got serious about reducing my credit card debt, I began paying all of the interest on my statement a week after making the minimum monthly payment. That is a chunk of change at first. If paying it all at once breaks your budget, divide it into three payments. The key is to stop paying interest on the interest. If you are able to pay all of the interest at once, try paying at least one other payment during the month. Even if you pay as little as $25 extra each month, you will be attacking your debt.

In a short while, you will notice that your minimum payment is shrinking. Do not fall into the trap of making a shrinking payment, as well. Keep sending the $200 you began with. That will cut your debt more quickly. Once you notice that your monthly interest charge has dropped below $50 per month, continue to pay $50. Remember, the goal is to eliminate this debt as quickly as possible. Paying on a single credit card in this manner should eliminate the debt within 24 months, freeing you to attack the next debt. This method is sometimes referred to as ”snowballing” your debt. I was using the system before it had a name, so call it whatever you want. Also, once you pay off the balance, keep the account open. The length of your credit history accounts for 15 percent of your credit score, so closing an older account can be quite damaging.

Non-Card Debt

Many auto and home lenders allow borrowers to make additional payments. While your lender may have specific guidelines for these payments, you can generally make additional full payments per year or pay an additional amount every month. With a mortgage, paying a single extra payment each year can shave around five years off a 30 year note. Coming up with an extra house payment all at once can be difficult. Dividing your payment by twelve and adding that amount to your payment each month will shave those same five years plus and additional two months off your note. An additional benefit could be getting to 20 percent equity sooner so you can eliminate the PMI from your mortgage, reducing your monthly payment.

The results are not so dramatic with an auto loan, but you can still shave months and interest paid from the loan while preventing yourself from owing more than the vehicle is worth.

As you labor to eliminate your debt, you may find yourself tempted to splurge a bit. Maybe have a night out, but find yourself needing to use your card. Go ahead! In moderation, though. Only spend what you know you will be paying off that month. Everyone slips from time to time. The key is to get yourself accustomed to paying for your ”splurges” with cash. Good luck on your journey to debt freedom. It may be a struggle, but it is well worth all of your efforts.

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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