How much do you pay in interest every month? It’s not hard to figure out. How much are you in debt? All you have to do is look at your monthly statements, the interest is always a separate entry. Add all the interest figures together. That’s your answer.
The average credit card charges 13.6 percent interest annually. So, on a balance of $1,000.00, that’s a little over $11.00 a month. That doesn’t seem like much, but it’s about $136.00 a year. (That’s just on a single $1,000.00 of debt.)
What about your total debt? Do you have student loans, a car payment, or a mortgage? Anything else? When it’s all added up you spend quite a lot of money on interest every month, every year.
Because we are talking about saving money, reducing, and eliminating interest payments, getting out of debt is a logical place to start. I think, however, there is something to do even before we begin reducing indebtedness.
Before we discuss paying off debt, let’s talk about establishing an emergency fund: An emergency fund is to be used only in the event of a true emergency. The purpose of an emergency fund is to provide a way to pay cash for an unexpected bill that would, otherwise, have us using credit. We don’t want to use credit because we don’t want to pay the interest. I would say start an emergency fund with the amount of money it would take to cover the deductable of either your health insurance or the deductable of your auto insurance (whichever is greater). In the event that you need to use this money, replenish it as quickly as you can. Once you have and maintain this safety net, you can begin to accelerate paying off you long-term debts.
Now, with regard to paying off debt, I would first determine not to go any further into debt. Next, I would save every dime I could get my hands on and apply it to my debt principle. I would save as fast as I could: I would buy fewer groceries, drive the car less, brown bag it to work, and sell whatever I didn’t need.
The following strategy is very viable for becoming debt free (after establishing an emergency fund). This get-out-of-debt strategy is sometimes called the “debt snow ball”:
- List all of your debt according to amount due, from the smallest balance to the largest.
- Determine the current minimum payment for each bill. Each of those figures becomes the monthly minimum paid to its corresponding bill every month. Over time, the minimum amount due (the payment amount required by the creditor) should decrease. You, however, will continue to pay what you have previously determined to be your minimum. Eventually, you will be paying more than the required amount to each creditor (except, maybe, for your car and mortgage).
- Start with the bill that has the smallest balance. When you have any extra money, apply it to this bill in order to pay it off as quickly as possible.
- Nice job! The first of your bills is gone. Apply the amount of money you were paying to that bill to the one that (now) has the smallest balance.
- As you pay off each bill, transfer the amount you were paying to the next bill on your list until you are debt free.Was this article helpful? If it was please share it.
After you are debt free, it’s a perfect time to redo your budget. Now, you can start saving. What’s in your future? Whether it is a need or a want, you can determine to have it without the shackles of debt.