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Four steps to reduce your debt
The next step is to make a list, using the form on the next page, of all the debt payments you make each month. Include payments on credit cards, store cards, installment loans, home equity loans, payments to repay personal loans to friends and family—payments on everything you owe to anybody. (Don’t include mortgage payments. Like rent, they are a basic housing cost. And unlike your other debts, you can pay off your mortgage at any time by selling your home.) For each debt, list
Once you write this information on a list, it’s easy to see how big or how small your problem is. Many people with debt problems resist making a list like this because they’re afraid it will show their debts to be frighteningly large. But the surprise is often that the total is smaller than expected. That’s because money worries can push people to inflate their debts to impossible size in their imaginations. Knowing the actual number grounds you in reality and lets you get down to the business of chipping away at your debts to make them smaller and more manageable. When it comes to getting out of debt, knowledge really is power. Now you’re ready to come up with a debt repayment plan. If you can find another $50 or $100 each month to pay toward your debts, you can start to wipe them away—one by one, month by month. Look back at your monthly spending chart and the amount you decided that your spending plan would save every month. Divide that savings amount in half. This is how much you can add to your debt payments, starting this month. (You’ll put the other half into a savings account as a cushion against any interruption in your income or unexpected expenses. We’ll discuss this in the last section. If you already have $2,500 or more in a savings account, then you can apply the entire amount saved from your spending plan to reducing your debt.) Now look at your list of debts. Choose one to pay off first. It should either be the one with the highest interest rate or the one with the lowest balance. It’s your choice. The one with the highest interest rate is costing you the most every month. You’ll make a bigger impact on your spending if you pay that one off first. But the satisfaction of paying a loan off completely is an important motivation, and that will happen sooner if you choose the loan with the smallest balance. Starting this month, add your extra debt-payment allowance (the amount you calculated above) to your payment toward the debt you’ve singled out. So if you had been paying the minimum of $20 a month on a credit card bill and you’ve decided you can add $50 to your debt payments, you’ll pay $70 a month toward this card. Keep making your regular monthly payments toward the other debts. You’ll get to them next. An extra $50 or $100 payment every month may not seem like much, but it makes a huge difference in how long it takes to repay a debt and to the total amount you pay. An extra $50 per month can reduce the time it takes to pay off a $4,000 credit card balance from 45 years to less than six years. And it can reduce the total amount of interest you pay from more that $11,000 to less than $2,000. Paying an extra $100 per month reduces the payoff time to just over three years and the total interest to just over $1,000. As you focus your repayment efforts on that one debt, you’ll have the satisfaction of seeing the balance shrink over the course of several months until it finally disappears. When that happens, it will be time to move on to the next debt. (As with the first one, you decide whether it’s the loan with the smallest balance or the highest interest rate.) And here’s where the magic of interest rates starts to work in your favor. When you pay off the first debt, you free up the money you were paying in interest on that loan. Now you’ll be able to pay even more each month toward the second debt. And the speed of your repayment plan will begin to pick up. Let’s say you were paying $70 a month toward the first loan (the $20 minimum payment plus the $50 you added). And let’s suppose the minimum payment on the second loan is $30. You can actually afford to pay $100 a month toward that second loan now (the $70 you were paying toward the first loan, plus the $30 minimum on the second). You just need to keep to your spending plan. You’ll be paying the same amount of money toward your debts, and those debts will be disappearing faster. Stick with it This four-step plan is a sure-fire way to reduce your debts. It’s a strategy that’s worked for thousands of people who have overcome serious debt problems. It’s the basis of the support offered through professional debt counseling and through groups such as Debtors Anonymous. But it’s not a quick fix. It takes time. And it takes your steady commitment to stick with the plan. You may be tempted to skip a month sometimes or to make an exception and charge something on a credit card or store account card. Nobody will stop you. It’s your money, your debt, and your responsibility. But from your own math and the graphs in this booklet, you can see that any slips will set you back and delay the success of the plan. Just as debts can “snowball” and build up to get you in debt trouble, so a debt repayment plan can snowball in the opposite way, picking up speed and becoming easier as you shed more and more of your debt interest payments. So stick with it. And watch as your debt steadily dwindles until it finally disappears. Getting Out of Debts (Step by Step Instructions)
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