As promised I wanted to share what method we are using to pay off our debt.
The first step is to come up with $1,000 for an emergency fund. For some people this may not be enough, but it’s a start, and will cover most emergencies. It will also give you peace of mind to know that you have something set aside instead of feeling as though you have nothing to fall back on.
Next, you need a spreadsheet that includes ALL your debts (yes, include your mortgage and those low interest rate student loans). I prefer to do this on my computer since I can move the rows around once everything is typed up.
You can use this great FREE template on GoogleDocs. I input some pretend data so you can see how it works.
There are 2 main schools of thought on debt repayment.
Debt Snowball (lowest balance-highest balance)
This is considered “the Dave Ramsey
You pay the extra to the lowest balance card, and then take the minimum payment + the extra $ + the next card’s minimum payment=new monthly payment. You continue to “snowball” your payments until all your debts are paid off. See the example below.
Credit Card #1 $3000 Min. Payment $100 12.99%
Credit card #2 $5000 Min. Payment $150 15%
Car Loan $10,000 Min. Payment $250 7.5%
Totals $18,000 Min. Payment $500
If you had an extra $100 to put towards your debt each month, you would start at the top of the list. Your payments would look like this:
Credit card #1 : $200
Credit card #2: $150
Car Loan: $250
Total to debt: $600
Once the first card is paid off you would take the $200 and add it to your current minimum payment on card #2. Your payments would look like this:
Credit Card #2: $350
Car Loan: $250
You continue with this snowballing your debt until it is paid off.
Debt Avalanche (highest interest rate-lowest interest rate)
In this example you do the same as the above, only you order your debts based on the percentage rate. This makes more financial sense. You will end up paying less interest over the time you are paying off your debts. For some people this can be a significant amount of money.
Using our example above here is how you order the debts based on interest rates:
Credit card #2 $5000 Min. Payment $150 15%
Credit Card #1 $3000 Min. Payment $100 12.99%
Car Loan $10,000 Min. Payment $250 7.5%
Totals $18,000 Min. Payment $500
Your payments would look like this:
Credit card #1 : $250
Credit card #2: $100
Car Loan: $250
Total to debt: $600
Other methods/tricks
Snowflaking
This is a method used in addition to snowballing debt. Essentially when you get any extra money you throw it at your debt. That Ebay sale, or the birthday money from great Aunt Edna-it all goes towards your debt snowball. I’m amazed by how much those little snowflakes add up.
Recession Proof Debt Snowball
This is a very solid method from FrugalDad. I think it is especially good advice for families, particularly single income families. Essentially you start with a small emergency fund of $1,000 and then add any additional funds to your emergency fund. Once it reaches the balance of your first card PLUS the $1,000 you pay off your first debt. This ensures that if you encounter any serious emergencies you don’t add more debt to your credit cards.
Debt Deluge by No Credit Needed
This method involves using the psychological boost of the Debt Snowball, and the power of the Debt Avalanche. You start with the lowest balance, and then halfway through switch to paying off your higher interest rates.
This method would look like this:
Credit Card #1 $900 8.99%
Credit Card #2 $1200 7.99%
Credit Card #3 $5000 12.99%
Car Loan $5000 6.5%
Student Loan $3000 4.25%
While many personal finance experts will tell you one is better than the other I am taking the approach that Ramit Sethi
recommends in his book, pick a method and stick to it. No use second guessing, running numbers every other day, or worrying yourself silly. It took you awhile to amass your debt, and it will take some time to eliminate it. Pick a plan and stick to it.
How we are paying off debt
We chose to start with creating an emergency fund. As I talked about previously we listed our debts on a spreadsheet, and worked on our budget with a fine tooth comb. EVERYTHING was examined, and anything that wasn’t essential was cut. We are paying off our debt starting with the lowest balance cards first for the psychological boost. My lowest interest rate cards had 2.99% and 0% rates, but paying off the highest balance card that is at 12.99% would have taken months, and since I’m very results driven, I needed to see the changes happen as soon as possible.
I’m also throwing anything extra that comes our way at our debts. All my income, a portion of the hubby’s income, and any random money we get all go towards debt. Any “found” money in the budget goes towards our debts. The $80 a month we’re saving by cutting cable goes to debt repayment.
So far we have paid off nearly $3,500 in debt using this method. I find it very rewarding, and we’re REALLY looking forward to the day when it’s gone!
If you had/have consumer debt how did/are you paying it off?
Kelly
photo credit: Andres Rueda
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