My Story: Paying Off Debts
contributed by DF
Get Out of Debt in 3 Steps
Every Penny Counts
Which Debt First?
My husband and I are both 25 years old, and have been working in the professional world for 2 years. We graduated from college with approximately $57,000 debt...we had credit card debt, two car payments, parental loans, and student loans. I thought we'd never get out of the hole we'd done such a good job of digging, but we will be debt free in one year from now (I'm not counting our mortgage). I'd like to share how we did it.
Organize: Figure out exactly how much debt you have, what the interest rates are, and what your minimum payments are. Also, keep track of exactly how much money you're bringing in each month, and what you're spending it on.
Consolidate: Get all those credit cards (including store credits) pulled together, and put them on one low interest account. If you have access to a credit union, that's a great place to start.
Simplify: We found that we were spending a lot of money on miscellaneous things. Once we kept an eye on what we were buying, we found that we were much more likely to decide that we really didn't need it (this is tough for new college grads who want to blow every paycheck as a "reward" for finally getting a real job!). We also thought long and hard about the "extras" we were paying for like cable TV and call waiting. We canceled both.
Prioritize: Prioritize your bills in the order in which you want to pay them off. We chose to pay off our parents first (no interest, but guilt counts for something), then we went for the high interest-low balance accounts (credit cards), then we went for the medium interest-medium balance accounts (cars), and finally we attacked the low interest-high balance accounts (student loans). I would suggest sitting down with a home finance computer program to help you figure out your priorities. Do it right, and you'll save a bundle on interest.
If this step intimidates you, make it simple. Attack the low balance bills first, then the medium balance bills, and finally the high balance bills.
Make Extra Payments: After completing the organizing and simplifying steps, you should find that you have some extra money each month. Take that extra money, and put it towards whichever bill is at the top of your priority list (in addition to that bill's minimum payment). Make minimum payments on all the other bills. Keep doing this until that first bill is paid off. Then (this is where it gets fun!), take the extra plus the minimum payment for the bill you just paid off, and apply it all to the next bill on your list. You'll be amazed at how this snowballs - you'll have all the bills paid off earlier than if you just paid minimum payments, and you'll have them paid off earlier than if you put a little extra toward each bill.
Evaluate Your Savings Account: This one is a tough one because everyone wants to have their savings safety net. The safety net is good, but the savings account is not. What are you earning on your savings account? I suggest that you take whatever you're putting in savings, and lump it together into your "extra" for bills. Keep in mind that 1% interest on savings plus 12+% interest on debt equals NEGATIVE CASH IN YOUR POCKET. Put your savings to work and pay off those bills.
What about the safety net you ask? What if there is some kind of emergency and you need cash?? Well, that is where credit comes in. If you're anything like us, you're not spending your savings on emergencies anyway...you're spending it on definite non-emergency items. If you do have a true emergency, you will find someone to loan you the money (bank, credit card, credit union, etc).
Have Patience: We're blessed. Not only are we young with no kids, we also have two solid paychecks and found that we can live well below our means and still have fun. But even for people who can only scrape together $20 extra each month - you can apply this to your situation. It will take you a bit longer, but it will be worth it.
Good luck and happy bill paying!
Take the Next Step:
- Get proactive about tackling your debt. Get the TDS ebook How to Conquer Your Debt No Matter How Much You Have and begin the journey to financial freedom today!
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