When you are in debt, especially debt of significant amounts, you are rarely comfortable. Yes, you may be on track with your payments, however, there is always that worry in the back of your mind that continually makes you think of worst-case scenarios. What happens if you are fired or lose your job? What if you get injured and have to miss work a lot? How can I save for future goals when all my paychecks go toward making my minimum payments?
If this sounds familiar, you are not alone. Millions of people are currently living with debt that seems to drain their bank accounts and wallets. However, there is hope. It is not easy and will require a lot of focus and discipline, but you can eliminate your debts once and for all. Let’s take a look at an action plan that consists of just three steps and has proven to be the best method of eliminating debt.
1. A precise current state
To get started, you need to have an idea of the debts you have, the remaining balances, the minimum payments, and the current interest rates. Create a list that contains this information, along with the company that you owe the debt to. Once you have completed it, organize the list in one of two ways.
One way you can organize your list is by using the remaining balances. Start with the account with the highest amount remaining to pay and work your way through the list to the lowest remaining balance. Another method of building your list is to use the same procedures, but start your list with the account with the highest interest rate. Continue with your list until you are sure you have not forgotten any debt.
To help you decide which method of building your list is best for you, ask yourself two questions: Are your remaining balance amounts high enough, and how many payments do you have left to pay? If you have a substantial amount of money left to pay, use the interest rate method. By eliminating debt with the highest interest rate, you will save money in the long run. However, if your remaining balances are low to moderate, use the remaining balances method. Once you eliminate the larger debt you owe, you will have more funds to apply to the smaller debt.
2. Organize your funds
With the list in hand, set aside enough money to cover the minimum payments on each debt. With the funds you have left, apply an additional payment amount to the debt that is at the top of your list, that is, make two payments. If the minimum payment is too high and you don’t have enough funds to make an additional payment, work your way up your list to debt where you can afford to make an additional payment.
Yes, you can go ahead and apply your remaining funds to the remaining debt balance that you have at the top of your list, however, our goal is to pay off your debts, not pay them off. All of this will become clear a little later.
3. Put them up and down
Once you have started this plan, continue until the first debt is fully paid off. When it’s over, you can take the money from that payment you no longer have and apply it to the next debt on your list. If you had to skip the principal debt, go back and see if you now have enough to make two payments. Continue paying your debts in this way until you have completely cleared your list. In a short time you will have achieved what you initially thought would be impossible, you will have eliminated your debts.
Does this plan sound familiar to you? It is commonly known as the “debt snowball”. No, I am not saying that this little bit of genius is my creation. I am simply saying that it is the best way to eliminate your debts without causing even more financial difficulties. Just keep in mind that if you are having difficulty making even the minimum payments, you will have to find an additional source of income to start this plan or seek financial counseling to help you through alternative methods.
I hope you enjoyed this article and that the information provided helps you on your path to financial freedom. Feel free to leave comments, I love comments.