How To Get Out Of Debt |
| First the bad news... there is no magic
solution (unless you win the lottery). Now the good news! It is possible to get out of debt. |
| The first step is to realize that you have to
much debt. That sounds simple, but just how much debt is to much. Well here is
a good rule of thumb, your monthly debt payments (credit cards, car payments, bank loans)
should not exceed 10% of your gross monthly household income. For example if your
gross monthly household income is $4000 then your total debt payments should not be more
than $400. So it is fairly easy to determine if you are carrying to much debt. Now, if you have to much debt and you want to get out there are several rules you will have to adopt and live by until you get your finances in order. 1. You will never get your credit cards paid off if you do not stop using them. Either cut them up, or put them in your sock drawer and forget about them. 2. If you are already too far in debt, and you cannot afford to pay cash for an item (pay for it once), then you surely cannot afford to buy it on credit (pay for it twice) at 15% to 21% interest. 3. Almost anything you buy with a credit card or a consumer loan depreciates rapidly. You are not improving your net worth by owning those things, so make sure you really need the item before you decide take on the debt. 4. You really need to have a monthly budget. You will be amazed at how much of your money is slipping through cracks in your finances.
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| Now that we have the ground rules laid out
let's get down to the nuts and bolts. 1. Make a list of all of your debts with the monthly payment, and the balance. Click here to get blank table to use. 2. Circle whether the debt is a revolving account (credit cards, store charges, gas cards, lines of credit) or a fixed closed end loan (car loans, consumer loans). 3. Now go through the list and find the revolving debt with the lowest balance and put a "1" in the "Payoff Priority" column. Now find the revolving debt with the next smallest balance and put a "2" in the priority column. Continue until all the revolving debts have been prioritized. 4. Next go through the list and find the fixed debt with the lowest balance and put the next available number in the "Payoff Priority" column. Now find the fixed with the next smallest balance and put the next available number the priority column. Continue until all the revolving debts have been prioritized. 5. Now pay the minimum due (provided it is enough to cover the monthly interest charge) on all of you debts except the one with a "1" in the "Payoff Priority" column. Send this creditor as much extra as you possibly can until the debt is paid off. Then move on to the debt with a "2" in the payoff column and send as much extra (including what you would have normally paid on the debt you just paid off) to that creditor. Keep going until you have them all paid off, or you have you finances back in control. Click here to calculate how long it will take to payoff a debt.
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| The logic here is simple. You are already
strapped for cash because of you debt. Odds are you probably don't have enough to
pay a little extra on all of your bills, and you certainly don't have enough to pay a lot
extra on your larger payment debts. So you start small and knock out the lower
balance debts. This will yield results much more quickly and will also give you a
sense of accomplishment by actually paying off a creditor. Don't make the mistake of thinking you have to payoff the higher interest rate loans first. The interest savings realized by paying off a 21% interest credit card before a card with an 18% rate is probably not worth loosing your focus. Which is reducing the number of bills you have to pay each month. Once you get you finances back in order then make sound decisions about borrowing money at favorable rates. Now that you are back in control of your spending you will have extra money to save, and to do something you did not think possible - PAY CASH!!! |
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Other Books In the Library Main Library Page <> Down Payment Stratagies <> Chart of Interest Rates <> Questions To Ask A Lender <> What Are Lenders Looking For? <> Why Buy A Home <> VA Loans <> FHA Loans <> Settlement Cost Handbook <> 3 Things To Avoid <> How To Get Out Of Debt <> Understanding How To Use Credit <> Credit Repair <> Appraisals <> Title Insurance <> Credit Scores <> Automated Underwriting <> |