Paying Down Debt

I suspect that one of the main reasons you are reading this, is because you are seeking financial help. Well you’re not alone. There are millions of internet searches each month for a financial planner or financial advisor. That should give you an idea of how many people are in need of financial help today.

My goal is to help add to your financial education, and try to get you started on your way to financial freedom. As I have said before, it isn’t going to be easy, but I promise that it will be worth your effort.

In this article, I discuss paying down debt using what is commonly known as debt snowball. I’ve seen many people recommend different ways to reduce dept. One that I do not recommend is a debt consolidation loan. This is where you combine all your debt into one loan and make one payment to one lender until that loan. It sounds like a good idea, but what you are really doing is moving your loan from one place to another. What do you think happens if you’re late or miss a payment? That person knocking on your door isn’t the Avon lady, but it might be the repo man.

The first step to paying down you’re loans is to list out everything out on paper for you to get a clear vision of where you currently stand. I want you to take out some paper or if you’re like me, use a spreadsheet, and make four columns. Next, list out your loans in order of the lowest to highest just as I show below.

 

Description	Amount	Min Payment	My Payment
Visa	$300	$20
Bank Loan	$1,000	$80
Student Loan	$10,000	$150

 

Now let’s say that you currently owe on three loans, and you are making the minimum payments to pay down these loans. At that rate you will end up taking years to pay off these loans because most of your payment is actually going on interest. If you continue to put more on your credit cards, it makes it more difficult to pay off.

 

 

Make a commitment. Commit to pay extra on that first loan to pay it off as soon as you can. The actual time it takes to do this will vary depending on how much extra money you can get your hands on. Let’s say in this example, you skip a few trips to Starbucks, or order water with your meal when you eat out and save an extra $20 per week, $80 per month. You add that $80 to your current payment of $20 and you now have $100 per month to pay on your $300 visa card. In the fourth column on your spreadsheet, write down your new monthly payment of $100. Now instead of taking years to pay off that loan, you are now paying it off in 3 months, while you are paying the minimum payment on the remainder of your loans.

Now that your first loan is paid off, you take the $100 that you was paying on your first loan and add that amount to the next loan on the list, which in our example will be $180 per month. This method of paying off loans is commonly known as the debt snowball method.

Description	Amount	Min Payment	My Payment
Visa	$300	$20	$100
Bank Loan	$1,000	$80	$180
Student Loan	$10,000	$150

Keep in mind that while this method of paying down debt works great and is my preferred method, you must be committed to making this a priority, and you don’t want to add any more debt to what you currently have. You should also plan for the predictable extra expenses like car insurance, and Christmas gifts. As well as look into reducing additional expenses such as purchasing gifts, food expenses, car insurance, and other expenses. Every dollar you can save is the same as money eared.

I’m sure that you have heard the saying “a penny saved, is a penny earned.” Well call me captain obvious, but I have to state the obvious with another example. Let’s say you’re making $10 per hour working 8 hours per day stocking shelves at the local hardware store. On your way to work you pick up a cup of coffee to help you wake you up on your drive into work, which cost you $1.08 including tax. Before you know it the day is half way over and you go to your favorite fast food place and grab a sandwich, fries and a drink for $7.58 including tax. You have already spent $8.66 for the day.

Now let’s look at option number two. Instead of buying that cup of coffee on your way to work, you make your own coffee before leaving the house. You grab your lunch on the way out the door, which consist of leftovers from the great home cooked meal you had the night before. You have now just saved yourself from spending that $8.66 which is the same as making an extra $1 per hour, or giving yourself a 10% increase in pay. Congratulations on your new pay increase, you deserve it.

I hope that this explanation of paying down debt using the debt snowball approach helps you. If you’re serious about wanting to eliminate your current debt, take the next step and create the table as I described and put your debt on paper. Look it over and you will see how this method will work for you.