Getting Out of Debt

Debt is bad and you want to get rid of it right away. Nothing destroys lives, marriages and creates more stress than being in debt. The way out is not hard in theory but requires a life change. This is usually were people pass or fail; many times they are unwilling to make a lifestyle change to save their financial future. When you want to buy that Lexus, remember: the ancient Greeks and Romans walked around in sandals and wore robes and they were just fine. Cars are luxury items, so be a smart purchaser. Remember that expensive doesn’t always mean better quality. Many vehicles carrying moderate price tags are better performing than overpriced luxury cars so do your homework. And always remember that a vehicle depreciates the moment you get behind the wheel. Billionaire investor Warren Buffet still lives in a modest house in Nebraska; the same house he’s lived in for over 50 years!. This is the mindset I’m talking about, this is key. If you can’t change your lifestyle, you will never get out of debt.

The rest is easy. First, downsize. Get rid of the extra gadgets, unnecessary expenses and re-budget so that you have positive cash flow every month. Next, you want to take your extra monthly income and pay down your debt in the following manner. First pay off the account that is accruing the most in interest charges every month. This doesn’t necessarily equate to the account with the highest interest rate. In most cases, this will be the account with the highest total balance but do the math anyway to compare finance charges on all of your accounts. Continue to pay the rest of your accounts in the same manner. If you have multiple accounts with similar interest rates, try your best to pay them equally. It never does any good to pay a significant amount on one card but only the minimums on another high balance, high interest card. Minimum payments are the credit card companies’ way to keep you in debt forever as many times the minimum payment barely covers or is less than the monthly interest you are being assessed.

Here’s an example for clarity: Let’s say you have $1,000 per month allocated for the pay down of credit card debt. This is what I would do in this scenario:

Example:

Credit Card
#1 $3,500 balance 15% interestrn#2 $500 balance 19% interestrn#3 $800 balance 17% interestrn#4 $2,000 balance 16% interest

In this scenario I would pay down #1 first by allocating 100% of my monthly $1,000 until it was completely paid off. Then I would use the same process for #4. This is because even though the interest rate is lower for both, the total balance for each is greater and you’re paying more in total interest than on the lower balances with higher rates. That’s why I don’t agree with paying down the debt with the highest interest rate first as some experts suggest. I always pay off the debt that is costing me the most in total interest payments.