Photo (cc) by xJason.Rogersx
The average American is more than $10,000 in debt. With a number like that, an offer to skip a payment on your mortgage or car loan might sound generous.
But in reality, you’re the one being generous – by paying extra fees and interest on top of making that payment later anyway.
To hear the math and see how this works, check Stacy out in the video below. Then read on for more advice on dealing with your debt…
As you heard in the video, with a credit card balance of $5,000 and a monthly payment of $150, skipping a payment could mean an extra two months to pay off the loan, depending on your interest rate and tacked-on fees. In other words, skipping $150 just once may cost you $300 in the long run.
The only situation where accepting such an offer makes much sense is when you don’t have the money to make the payment. If you’re not able to pay, that could mean bruising your credit score and enduring a higher interest rate, so obviously taking advantage of a skip-a-payment offer would be the better option. In every other scenario, however, voluntarily skipping a payment will only result in your lender getting richer at your expense.
In general, here’s the best way to cut debt…
1. Set a goal
As with weight loss, wanting and doing aren’t the same. It helps to set an exact goal that allows you to measure the progress – a dollar figure by a certain date. To learn more about goal-setting, see our story Step One in Destroying Debts: Set a Goal.
Goals work by helping you visualize the end result, and that helps motivate you to change your mindset. Goals can include anything: early retirement, buying a house or new car, putting your kids through college, starting your own business, or simply living debt-free. But whatever you pick has to be more compelling than the Starbucks you enjoy every morning or that extra meal out you have each week.
2. List your debts
If you have multiple cards or loans with different lenders, lay out the balances, then decide on the order you want to tackle them. You’ll pay the minimum toward all but the highest priority debt: On your target debt, you’ll pay the maximum you can scrape together. When it’s destroyed, you’ll move to the next debt on your list.
There are two popular approaches: smallest debt first or highest interest rate first. In his book Life or Debt Stacy recommends tackling smaller debts first. That’s because many people find it psychologically more encouraging to see debts wiped out sooner than to know they’re paying less interest overall – which is the advantage of focusing on high-APR debts. Use whichever method will keep you the most motivated. A debt calculator can help you compare various methods.
3. Put together a spending plan
The more money you put toward your debt, the faster it disappears. But there are only two ways to come up with extra cash: make more or spend less. For most people, spending less is the simplest way to start, although it’s not always easy. Creating a spending plan – also known as a budget – will allow you to quickly see where your money is going and where you might find extra money to apply toward your goals.
There are any number of ways to put together a spending plan. The old-fashioned route of pen and paper works fine for some people, but there’s also plenty of higher-tech help available.
- Create a budget from scratch using Microsoft Excel (or Calc, the free and fully compatible Open Office version)
- Free ready-made spreadsheets, including the one Stacy uses
- Mint.com can help with goal-setting and track your financial accounts
- Bundle.com, which is similar but also lets you see how and where others spend their money
4. Cut costs
Here’s the hard part: doing what it takes to make your expenses start shrinking.
A spending plan breaks down expenses by categories, so you’ll immediately see how much you’re spending and where you can try to cut back. The idea, if at all possible, is to reduce the money you’re spending without sacrificing your quality of life. The last thing you want is to feel like you’re on a “dollar diet,” because diets are hard to stick with.
Gain without pain: That’s the idea behind stories we do all the time…
- 28 Tasty Tips to Save on Food
- You Don’t Have to Pay for Cable TV
- 18 Tips to Dress for Less
- 26 Ways to Save on Entertainment
- 12 Things People Buy They Could Get For Free
- 7 Things You Should Always Buy Generic
- 205 Ways to Save
5. Get help
If you’re in over your head, professionals can help. But make sure you don’t get ripped off. If you’re in debt trouble, consider talking to a credit counseling organization. For advice on how to recognize reliable debt advice, check out Finding Help With Debt. If you’re on the other end of the spectrum and having trouble getting credit, check out 8 Tips to Get Credit.
Debt can be beaten, but skipping payments won’t help. Our advice will – check out this post from one of our readers who got rid of $10,000 in debt by following Stacy’s advice in Life or Debt 2010. And if you’re looking for a card with a lower interest rate, check out our credit card search as well.