A Simple System to Destroy Debt

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It's possible to pay off every debt you have in months, rather than years. It's not easy, but it is simple. Here's a five-step process that will work, if you work it.

Ask anyone how much they make, and you’ll get an instant answer – to the penny. But ask the same person how much they owe, and don’t be surprised if their eyes glaze over.

If you don’t know how much you owe, you’re not alone. As you’ll see in the video below, Consolidated Credit Counseling president Gary Herman says most people seeking help from their agency can’t provide an accurate list of their debts.

Keeping on top of credit and debt isn’t at the forefront of many American minds. The National Foundation for Credit Counseling’s 2012 survey of financial literacy reports that one-third of adults don’t pay all their bills on time, and in the past year, “most adults have reviewed neither their credit score (55%) nor their credit report (62%).”

Check out the video. On the other side, we’ll walk through the process of destroying your debts.

The following steps describe a process Stacy and other consumer advocates have been using for decades. For more details, you can read his book Life or Debt 2010, but it’s not complicated. It’s called snowballing. And if you doubt it will work for you, simply read How I Wiped Out $37,000 of Debt in One Year and Reader Shrinks Credit Card Debt.

Step 1: Make a goal.

The easiest way to accomplish anything in life is to create a specific goal: something you intend to achieve, along with a deadline for getting there.  Then stay focused by visualizing how success will improve your life. For example, if losing weight is the goal, decide exactly how many pounds and by what date. Stay motivated by habitually visualizing the “new you.”

If losing debt is the goal, decide exactly how much debt you’re going to destroy by what date. Then keep yourself motivated by visualizing the rewards: using money now going to interest for better things, like retiring early, starting your own business, putting your kids through college, or buying a house – whatever it takes to keep you keeping on.

Making a concrete goal and visualizing the rewards of achieving it is the single best way to go from wanting something to getting something. Unless you can make your goal more powerful than your existing habits, nothing will change.

Step 2: Make a list of your debts.

Now that you know how much debt you’re going to destroy, it’s time to pick the first target.

There are two popular options: The first is to assign the highest priority to the smallest balance. The other is to focus on the debt with the highest interest rate.

Smallest-debt-first is popular is because as debts are paid off, you feel a sense of accomplishment that keeps you motivated. Highest-rate-debt-first makes the most mathematical sense. Choose based on your personality and the way you’ll feel most motivated.  But whichever method you use, whenever a debt is paid, use the old payments from it to attack the next debt on your list – that’s the “snowballing” part.

Want to see how different scenarios would work? Plug your debts into a debt calculator and compare the “interest order” and “balance order” options.

Step 3: Create a “debt destroyer.”

The more you pay on a debt, the faster it dies.  So it’s critical to create a “debt destroyer”: a lump sum of cash you add to the minimum monthly payment of your target debt. The bigger, the better, but something to shoot for would be 10 percent of your monthly gross income.

Where will you find it?

If you’re setting money aside for monthly savings, maybe you can temporarily use that to destroy debts. If you’re spending a lot on eating out at work, maybe you can bring your lunch from home. If you’re paying a lot for cable TV, maybe you can drop it and watch online instead. Maybe you can lower your insurance bills by raising your deductibles.

The best way to find the money for a debt destroyer is to track, then pick apart, your existing expenses. You can track your expenses in any number of ways, from Mint.com to free budgeting spreadsheets on this site. It’s not rocket science – just keep track of the money you spend every day, divide it into categories, and review it. You’re going to find money you can redirect to debt destruction.

That’s what this website is about – helping you find extra money, as painlessly as possible, you can use to pay down debt or otherwise become wealthier. Check out 28 Tasty Tips to Save on FoodYou Don’t Have to Pay for Cable TV18 Tips to Dress for Less26 Tips to Save on Entertainment, 12 Things People Buy They Could Get Free7 Things You Should Always Buy Generic, and 205 Ways to Save Money –  all stories about finding extra money without sacrificing your quality of life.

Step 4: Execute your plan.

You decided exactly how much debt to shed, and when you expect it to be gone. You prioritized your debts by size or interest rate. You surgically reduced your expenses and created a lump sum of monthly cash earmarked for debt – a debt destroyer.

All that’s left is to pull the trigger.

Make minimum payments on all but your target debt. On that debt, pay the minimum plus the debt destroyer.

When that debt is dust, go to the second debt in your list. For this one, send in the minimum, plus the debt destroyer, plus the minimum from debt 1. When debt 2 is destroyed, move to debt 3 – send in the minimum from debts 1 and 2, along with the debt destroyer.

Once you’ve snowballed your way to victory, and are completely debt-free,  take all those old payments and that debt destroyer and turn it into a money machine by investing it every month.

Step 5: If you need help, find it.

As Stacy says in Life or Debt 2010, it’s hard to focus on destroying your debt if your debt is destroying you. If you’ve lost your job, are unable to make your minimum payments, or are otherwise in a precarious position, this isn’t the time to use the steps above – it’s the time to reach out and get help.

There are three types of organizations that can help you deal with dangerous levels of debt. Stacy’s suggestion is to start with a credit counseling organization, but check out the following stories for more information:  Help With Debt: Credit Counseling, Should You Consider Debt Settlement? and How Ron Dealt with Debt: Bankruptcy.

Stacy Johnson

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