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March Madness, get crazy getting rid of that Credit Card debt (Step 4) – Ditching Debt

So finally we get to the payoff (literally). How do we ditch this debt that has grown after days, months, years of using the credit cards. There are a lot of theories out there on the best way to go about it, some of them great, some of them ok, and some of them terrible. Most of the terrible ones involve you paying someone to tell you how to do what I am going to tell you how to do…except I don’t charge anything for it. The credit card contest has really energized me to share as much as I possibly can for everyone. I want you all to crush your debt, I mean that, just absolutely kill it, and become rich. If any of you keep up on this blog and are getting out of debt, and you use these concepts to get out of debt, for the love of God, email me and let me know, I want to hear your story. Ill post it on here, and if you are ever in northern colorado Ill take you out for a beer and we can talk about what a relief it is.

I think its important to include that I am in the same boat as all of you, I have the same temptations, debts (hello 6 months of being laid off), and problems as the rest of you. In fact, chances are you have a leg up on me: I have to force myself to organize things. In the world of personal finance, organization is everything, and its my weakness. The trick is that this is a “long haul” game. Its not a short term solution, it has to be a life change. There will be times of falling off the bandwagon, but as long as you keep at it, and persevere, you WILL get everything paid off. So now exactly do we go about getting rid of this debt? Well there are several methods and I am going to go over each of them because I don’t believe there is a one size fits all catch all thing here but I am going to focus on the snowball method because I believe that is the easiest one to follow for most people.

If you are having trouble coming up with the money never fear, I have some methods in here as well to help come up with extra money to put toward the debts. You can use any mix of these methods so read them all.

Method #1: Debt snowball
This has been popularized by David Ramsey on both his radio show and his book Total Money Makeover (which I have read). Its a decent read of a book if you are curious, I would recommend picking it up. The way it works is that first make a list of all the debts you have, with the debt with the lowest balance being #1, the second lowest being #2, and so on down the list. Some of these are painful to look at.

I did this a while back and the one that hurt the worst oddly was my student loan debt. I had to take out the entirety of my student loans in 2 semesters meaning I got TERRIBLE rates. I had to pay my mortgage while going to school and I had 2 weeks notice I was being laid off, thats it. I wasn’t prepared for it at all because I had been given a top rating at Hewlett Packard and I was the sole engineer left on my team….why on earth would they lay me off? Well they did and I had no backup plan and no emergency fund so I got stuck with 15k in student loans at 12% interest. Ouch! In general loans that have something backing them up are not so terrible to look at: mortgage and car loans you have assetts there. The credit card debt is the one that is really really painful to see.

Next step is to allocate as much of your budget as possible (That we made in the previous article) to debt crushing. Now make the minumum payments to all of the debts except for the one with the smallest balance. For that one, pay the absolute most you can until it is gone.

Now with that money that you were paying toward that smaller balance debt, you put all of that money PLUS the minimum payment you were paying toward the second largest balance debt. This is why it is called the “debt snowball” because with every debt that is paid off, there is more and more available funds to pay off each progressive debt and eventually it is all gone.

Example:

Ignoring interest rates, let’s pretend you have the following debt (along with the minimum payments):

-Visa – $2500 balance – $150/month minimum
-Mastercard – $250 balance – $25/month minimum
-Student Loan – $15000 balance – $100/month minimum
-Discover – $1500 balance – $50/month minimum

Thats a total of $325/month. You would order the debts like this:

Mastercard $250
Discover $1500
Visa $2500
Student Loan $15000

Now if you allocate an extra $100 to paying off debt per month you would pay $125 toward the Mastercard, and the rest would get the minumum payments. After two months the Mastercard is paid off and you now allocate the $125 that you were paying for it plus the $50 minimum you have been paying toward the discover card so you are paying $175 toward the Discover until IT is paid off, then that $175 plus the $150 toward the Visa, and so on until all your debt is gone.

Pros: You get to see progress immediately, paying off smaller debts lets you “write off” each one. which is really nice. It is a great way to get in the rythm of paying off debts.

Cons: It does not take into account interest rates so you are not being 100% efficient at getting rid of debt.

Method #2 High interest to low interest

This method is fairly simple. Start with the exact same steps as the snowball method, except order your debts in order of highest interest rate to lowest interest rate. Now begin paying on the highest interest rate and add your extra money toward the highest interest rate until it is paid off, then move to the next highest interest rate putting the money from the first toward the second as well.

Pros: This is the most efficient way to pay off debt because you will end up paying the least amount of interest over all.
Cons: It is difficult to see progress, it may feel overwhelming.

What if you are having trouble coming up with money to help put toward your snowball, are there any options? Yes, yes there are.

Method #3 The Consolidation Loan

This is where you go to a bank or credit help insitution to get a consolidation loan for all of your high interest debt. Usually you will pay more with these types of loans in the long run, but if you are desperate it can reduce your payments. Things you should look for are to make sure there is no pre pay penalty because that is counterproductive to your cause.

Pros: Can help if simply cannot cut out enough to meet your payments, ability to reduce monthy payment
Cons: Will end up paying much more in the long run, generally higher fees for the service

Method #4 Sell stuff around the house

This is best if used in conjunction another methods. This can help get a jump start on knocking down balances. You can sell old clothing to second hand thrift stores. You could also have a garage sale and sell some things on ebay.

Pros: Gain some extra money, get rid of things you dont need and reduce clutter
Cons: May not net too much money from it

The main thing to keep in mind, this is a long race, not a 2 second fix, but you CAN see results right away. Get to it!

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