When I got home today I finally opened my mail and saw all my bank statements at once. My finances were fine, but at the bottom of my credit card statements I noticed a new feature; the bank had calculated how long it would take for me to pay off my debt if I only paid the minimum amount. Many of you may have already noticed this on your statements (I don’t open my mail on a regular basis), and it can be quite shocking at first: 10 years, 20 years, maybe even more if your debt is high. But this doesn’t have to be the case at all. After noticing a number of years at the bottom of my statement with this new feature, I decided to make a post about getting out of debt in order to give certain people hope and motivation.
How Much Debt Do You Have?
The first thing you need to do before even embarking on this journey is to figure out how much debt you are actually in. I know that nobody really wants to do this part, but if you don’t know exactly where you’re starting off at, how will you know how much progress you’ve made? Write down all your debts that you want to get rid of (you can leave off things like mortgage or any other debts that you don’t need to get rid of right away) and then write down exactly how much you owe on each one. It’ll be easier to alter this later if you’re organized the first time so try to put all your debt information in neat rows and columns. Try to write it down somewhere where you’ll see it every day so you can stay on track. Once you’ve got all your debts figured out, add it all up to get your total. This number might be more than you’re expecting but it’s good to finally look at it and know exactly where you’re at.
Keep in mind that if your debt is simply too much, it might be a good idea to take a look into declaring bankruptcy, even though this should be your last option. A good rule of thumb is if your debt is more than one years’ income for you, it might be too much to handle. If this is the case, you could try to pay it off, look into more creative financing or eventually declare bankruptcy. Please try to work through it first though; declaring bankruptcy can have many negative aspects on your financial records, your credit score and your future with finances in general. Think of this only as a last resort if you absolutely cannot handle your debt. If you want to work on paying off your debt, continue reading my post to find out how to do it as quickly as possible.
When Should You Make Payments?
The next thing you write down beside the type and amount of debt is when it’s due. It’s important to note when your payments are due so you can be sure to make them on time. If you neglect to make your monthly payments on time, your credit may decrease quickly. Remember, it is easier to mess up your credit than it is to build your credit back up again so keep your deadlines in check. Write down the exact day of the month that you need to make a payment on every debt you have listed as well as what the minimum payment is and add up all your minimum payments to find your total minimum debt per month. This will keep you organized while you work through your debt.
Keep Track of Your Income and Expenses
After you know how much debt you’re in how much you are absolutely required to pay, take at look at how much you’re actually making. Write down how much you make you per month since most people have to pay their bills on a monthly basis and we want to keep comparing apples to apples. Try to keep it on the lower side of your average income; it’s better to low ball it here and pay slightly less debt, than to high ball and not have enough money in your budget for food. Factor in your rent or mortgage, your food, utilities, transportation as well as your other expenses in order to see how much you can afford to spend on your debt. Make sure to minus your minimum payments on all your debts as well. For example if you make $3000 per month and spend $1500 on all your basic expenses and spend $500 on your minimum debt payments, you know that you can allocate $1000 straight into your debt every month. Try to keep a little bit of leeway in your finances for an emergency fund/ savings account or just in case something comes up.
So Which Debts Do You Pay Off First?
There are many ways to start attacking your debt but we’re going to focus on the snowball method. In this method, you put all of your extra money into one of your specific debts and just make the minimum payments on all of the other ones until the one you’re focusing on is entirely paid off. Then you move onto another debt, rinse and repeat. The trick is to start off with your highest interest debts first; therefore by paying these off the quickest you’ll save lots of money down the road in interest. Pay off the highest interest first, then the second highest interest and then the lowest interest rate last. So start off by figuring out which one needs to be paid off first and devote every last dollar to it until it is completely paid off. If you need more information on this method or want to use an automatic debt calculator, check out the Snowball Debt Calculator. Using this calculator you can figure out exactly when you’ll finally pay off all of your debt and how much money you’ll save along the way by following this system.
What If You Need to Pay It Off Faster?
If you take a look at your finances and realize that it is going to take too long to pay off your debt, there is really only one thing to do: make bigger payments. Every month interest is added to your debt and a very large chunk of your minimum payment is going just for your interest. This means that the money you put on your debt after you pay your interest will be put towards your current balance. Let’s say your minimum payment is $100. Out of that $100 only $12 or so goes to your actual balance and the rest is eaten up by interest. However, if you make a payment of $500 right after you make your minimum payment, the full $500 will go straight to your debt balance. So the whole point of this method is to get as much money as possible onto your debt after your interest is already paid. But what if you still can’t pay off you debt as fast as you need to?
All you have to do is make bigger payments so all you need is more money. In order to get more money all you have to do is get another stream of income or cut back your expenses. You could try to increase your wage by asking for a raise or even get a second job. You could pull out some money from your investments or from your savings. When it comes to cutting back your expenses you could try to simply limit a few things every week and watch the savings add up.
The Most Important Thing When Paying Off Your Debt Fast
The best thing you can do is just keep at it. No one said debt was fun, and paying it off is even worse because you have to restrict yourself and your lifestyle in order to come up with the money to put on your debts. Not to mention the interest that adds up after time. All this can be quite discouraging but you have to trudge through it. Most debts will not be paid off in a month or two and you have to keep up the good work long into the future. It is imperative to be consistent or you will never reach your goals. It is also important to stick with it no matter what you may hear. Don’t be tempted to spend money on yourself because of a plan you have which might make up for it in the future. Don’t go gamble your money hoping to make more, you may win a couple times but ultimately you will lose. Don’t buy into “get rich quick” schemes on the internet hoping to make a quick buck. Focus on your one specific debt entirely and use every last dollar you have to pay it off. Just focus on the one debt first instead of overwhelming yourself by looking at the entire picture. Take small steps and one by one your debts will disappear and you will finally be free.
The image used in this post is taken from Image: Pixomar / FreeDigitalPhotos.net
