Don't Miss

7 Steps to Paying off your Debt

By on March 25, 2017

A Debt free life is one which all of us want to achieve. But why is it so difficult to turn this dream into reality?. Dealing with debt doesn’t have to be painful but it does take lot of planning, discipline and sacrifice. Here are seven steps you must take to cross the bridge to  aPay off debt debt-free life, based on the rules outlined by financial guru Jean Chatzky in the book Money Rules: The Simple path to Lifelong Security.

Step 1 : Spend Less than You Make. Period.

Stick to money rule : Live below your means. Of course, this is easier said than done. In 2010, nearly 73% of Americans surveyed by the American Savings Education Council for America Saves Week said that they spent less than they earned and saved the rest. But in 2014, the percentage has shrunk to 60%. Needless to say until you spend less than you earn, you will never get out of debt.

Step 2: Recast your personal balance sheet by lowering all possible interest rates.

Credit Card: Transfer your credit card debt to cards with low or no interest. According to Nerdwallet.com, there are currently an introductory 0% interest rate on balance transfers if you have good credit.

Auto & Mortgage: Refinance your auto loan and mortgage (perhaps again, if you previously have) . Right now is a great time to do so. 30 year fixed mortgage refinances are averaging 4.05% right now.

Step 3: Pay Off High Interest Debt first.

It can be advantageous to focus on paying off your highest interest debt first. However, there is some back and forth over which of the techniques is a better way to pay off debts.

Avalanche: Focuses on paying off your highest debt first.

Snowball: Focuses on paying off your smallest debt first.

Say you have $300 to put toward your credit card debt each month. Card number one has a 20% interest rate, a $7000 balance and $140 minimum monthly payment. Card number two has a 13% interest rate, $3,000 balance and $60 monthly payment.

If you take avalanche approach and put your extra $100 a month toward card one, you’ll pay $3,760 on interest. Put that extra money toward card two instead and your interest tally is $4,304. That’s the difference of $544!

Step 4: Audit your bills to find more money.

Chances are you can make more money available to pay down your debt than you think. Find this money by calling your monthly billers – cable, cellphone, internet – asking for a better deal. Better yet, cancel monthly subscriptions that you don’t really need.

Step 5: Improve your credit Score:

Money Rule #30. Check your weight and your credit score every year. The latter should go up. Why? A better credit score gets you lower interest rates and saves you money. Improve your credit score by:

  1. Paying off your bills on time.
  2. Paying down debt to lower the percentage of the available credit you’re actually using.
  3. Not closing any credit cards.
  4. Not applying for new credit.

Consider this: Two people with different credit scores get a $20,000 car loan to be paid over 48 months. Here is how their credit score affects their monthly payments:

                                                    SUE                                                                        JIM

Credit Score: 720 to 840                               Credit Score: 500 to 589

Monthly payment: $448                               Monthly payment: $579

Because of his low score, Jim will pay over $6,000 more in interest over the life of the loan.

Step 6: 50 Points or More.

Once your score has improved by at least 50 points or more, repeat step 2.

Step 7: Save what you don’t spend.

When debt is gone, take the money you’re not using for repayment and save it by setting up an automatic transfer into savings account, money market account or IRA.

Money Rule #11: If you can’t see it and Can’t touch it, You won’t Spend It.

About beinginvestor