When you have debt, especially debt of significant amounts, you rarely feel comfortable. Yes, he may be up to date on his payments, however, there is always that worry in the back of his mind that continually makes him think of the worst case scenario. What happens if you get fired or lose your job? What if you get injured and have to miss a lot of work? How can I save for future goals when all my paychecks go toward making my minimum payments?
If this sounds familiar to you, 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’s not easy and will require a lot of focus and discipline, but you can eliminate your debt once and for all. Let’s take a look at an action plan that consists of only three steps and has been proven to be the best method to eliminate debt.
1. An accurate current state
To get started, you should have an idea of what debts you have, your remaining balances, minimum payments, and your current interest rates. Create a list containing this information, along with the company you owe the debt to. Once you’ve completed that, organize the list in one of two ways.
One way to organize your list is by using remaining balances. Start with the account in which you have the highest amount remaining due and work your way down 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 down your list until you’re sure you haven’t missed any debts.
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, opt for the interest rate method. By eliminating the debt with the highest interest rate, you will save money in the long run. However, if your remaining balances are low to moderate, go with the remaining balances method. Once you eliminate the largest debt you owe, you will have more funds to apply to smaller debts.
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 at the top of your list—in other words, make two payments. If the minimum payment is too high and you don’t have enough funds to make an additional payment, move down your list to the debt you can afford to make an additional payment.
Yes, you can go ahead and apply any remaining funds to the remaining balance of debt you have at the top of your list, however, our goal is to pay off your debts, not pay them off. All this will become clear a little later.
3. Set Them Up and Knock Them Down
Once you have started this plan, continue until you have paid off the first debt in full. When it’s gone, 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 off your debts this way until you’ve completely cleared your list. In no time, you will have achieved what you initially thought would be impossible, you have eliminated your debts.
Does this plan sound familiar to you? It is commonly known as the “debt snowball.” No, I’m not saying that this little piece of genius is my creation. I’m simply saying that it’s the best way to eliminate your debts without causing further financial hardship. Just keep in mind that if you are having difficulty making even the minimum payments, you will need to find an additional source of income to start this plan or seek financial advice to help through alternative methods.
I hope you have enjoyed this article and that the information provided helps you on your path to financial freedom. Please feel free to leave comments, I love comments.