Matter out of place

Personal finance weblog focusing on debt management and credit card debt

Kill Your Debt

So you have decided that you want to get out of debt? Maybe you just read “My debt is fine, right?” and figure that it’s time to do something. Well congratulations! You have already done the hardest part. Or, as they said at the end of every G.I. Joe cartoon, “…and knowing is half the battle.”

But you can’t go into battle without a plan. In order to form a plan that will work for you, you need to know exactly where you are. I remember when I was in debt, I didn’t look at my bills. I knew that I couldn’t pay them, so what was the point? It was depressing. So I let the unopened bills sit here or there, and sometimes I just threw them away. How irresponsible! Hopefully you haven’t thrown all your current bills away. Open them and look at the balances. If you have credit card debt or loans, look at the interest rates.

Now you are ready to categorize them. Your debts will go into two piles: Maximum and Minimum.

· Maximum – In the Max pile, you put your necessities. These bills are your most important obligations. They include utilities (except telephone), rent or mortgage, and the one credit card or loan with the highest interest rate.

· Minimum – These are your less important bills, and you will pay the MINIMUM payment until you pay off the debt with the highest interest rate in the Maximum category.

The next step is to compare your income to the total minimum payments of all your bills. If your income is higher than all your minimum bill payments, this method will work for you. If your minimum bills are higher than your income, you will need some extra help.

Hopefully, your situation is like mine was. I had enough to pay my bills, and chose to spend money on other things. If you, too, have enough money to pay your bills, continue your preparation by ordering your two piles by due date. Calculate how much money you will have after all your bills are paid, and divide the remainder in half. Half will go towards the credit card or loan with the highest interest rate. The other half will go into a savings account. You need to have a little extra money for emergencies (not including emergency wardrobe issues).

When you have paid off that credit card with the highest interest rate, move the bill with the highest interest in your Minimum pile to your Maximum pile. It then becomes the target of all your extra bill-paying money. You do this until all your non-necessity debts are paid off.

Do you want to get there faster? Try to reduce your spending.

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