Are you tired of paying credit card bills for things you no longer own? Do you wish you had an extra $200 in spending cash rather than a car payment?
If you are frustrated, remember that it doesn’t have to be that way — 2016 can be the year you climb out of the debt hole.
Here are three steps to achieving that goal.
Step 1: Get it in writing
You can use an Excel spreadsheet or simple pen and paper. Heck, use a glitter marker for all we care.
However you do it, write down each debt you owe along with its minimum payment and interest rate. If you have a credit card with a promotional rate or a mortgage with an adjustable rate, make a note of when those rates will change.
Your list should include all of the following, if you have them:
- Credit cards
- Home equity loans
- Vehicle loans
- Student loans
- Personal loans
- Loans from family members
- Payment plans for the doctor, veterinarian, mechanic, etc.
- 401(k) loans
Once you have all the debts written down, total them up. Now it’s time to bring that number down to zero.
Step 2: Create your debt repayment plan
This is much easier than it sounds. While you can use calculators and spreadsheets, there’s no reason to get that involved.
You can instantly create a debt repayment plan by going back through the list you created in Step 1 and numbering the debts in the order you would like them gone.
There are two theories when it comes to ordering debts.
- Theory 1. Order the debts by interest rate, starting with the highest rate and working your way down. This method may save the most money overall.
- Theory 2. Order the debts by their balance, starting with the smallest balance and working your way up. This method may help you quickly see progress and stay motivated.
Use whichever theory works best for you.
Step 3: Pyramid your payments
Now you need to put your plan into action. This involves something we call pyramiding. You may see others use the terms “snowball” or “avalanche.”
Essentially, it’s about focusing all your money on one debt and then building upon minimum payments as you knock out balances.
Go back to your list and review all the minimum payments due on your debts. Now compare those amounts with the numbers in your budget. (Don’t have one? Read how to develop an effortless budget.)
If you’re paying more than the minimums, reduce payments on all debts except whatever is No. 1 on your list.
For example, let’s say all your debt is on three credit cards. Each has a $25 minimum payment, but you’ve been paying $100 a month on each one.
To start your pyramid, drop the payment on each of two cards to $25 and add the remaining $75 to the third card’s payment. As a result, you’ll make $25 minimum payments on two cards and one $250 payment ($100+$75+$75) on the last card.
When that last card is paid off, take the $250 and add it to the second card on your list. Now, you’re making one $275 payment and one $25 payment.
When card No. 2 is paid off, combine the $275 with the $25 minimum you’ve been paying and make $300 payments until you finish off your debt.
The best way to make your pyramid grow
So why bother with the pyramid? If you’re going to be paying $300 in debt payments every month, does it really matter how you structure the payments?
The real benefit of pyramiding is psychological. It gives you a game plan to follow and helps you see results more quickly.
Rather than spending years paying small amounts without any apparent significant progress, you’re heaping all your money on a single debt and watching it disappear.
The secret to making this system work is to look for any and all extra cash you can redirect to your debt. Adding a couple hundred dollars to your payments each month will have you zooming through your debt repayment plan in no time.
And that brings us to our final point.
Reaching the $10,000 mark
You may be looking at the headline of this article and thinking there’s no way you could possibly pay off $10,000 in debt this year.
True, if you live on a $20,000 income, you’re probably not going to be able to pay off $10,000 without breaking a sweat. However, for many middle-class families, it’s probably doable.