Weekend Challenge 3: Get Out of Debt
Put Together Your Debt Elimination Plan
This weekend the challenge is to set your debt elimination plan into place. Getting out of debt is one of the first main steps to money management. Most financial experts agree that you should not begin investing until you have gotten rid of your consumer debt. A debt elimination plan helps you to pay off debt faster because it focuses your money and helps you to pay off the debts much more quickly. You can determine how quickly it works by determining how much extra money you should have each month.
Put Together a List of Your Debts
First, get your list of debts from last week. This list will make this weekend’s challenge much easier. If you don’t have the list you need to write down all of your debts. List the amount you owe, the interest rate and the minimum payment amount. You should include all of your credit card debt, any personal loans, your car loan, and your student loan. You should include your second mortgage or home equity line as well, but you do not need to include your primary mortgage.
Set the Order for Your Payment Plan
Next, you should determine if you want to pay off your debts from smallest to largest or from highest interest rate to lowest. The smallest to largest method helps you to build momentum more quickly, but you may pay a little bit more in interest. The highest to lowest interest rate will save you money in interest, but it may take a bit longer to build steam. You can decided which way you want to go and then list your debts in that order. When you start paying on your plan put all of the extra money on your first debt, until it is paid off and pay the minimums on the rest of the debt.
Once the first debt is paid off you take all of the money you were paying on the first payment and add it to the second until it is paid off and then you keep doing that until you are debt free.
Create a Chart to Track Your Progress
You have just created your debt snowball plan. It didn’t take very long, but in order for it to be effective it helps to have a physical representation that you can mark off to show that you are making progress. You can make a chart that allows you to cross out debt each time you pay it off. This can show you how far you have come in a few months time. Additionally you should write out a reward system, which can help you to stay motivated to stay on your plan. You can reward yourself at the first $1000.00, and then at $5,000.00, at the halfway point and at the three quarters point.
If you have a considerable amount of debt than you may want to add more rewards. The rewards should be small less than $50.00, but something that will motivate you to keep moving forward.
Find Extra Money to Pay Down Your Debt
The next step is to determine how much extra money you can apply to your debts each month. We will look at budgeting in detail next week, but you should put down an estimate of what you think you can do and then raise that by $100.00. Generally, you can squeeze that much extra money out of a budget each month. This week you just need to write down the goal of how much extra (above the minimum payments) that you can put towards getting out of debt each month.
Sell Items to Raise Money to Get Out of Debt
Finally, look around the house and list at least five things you are willing to sell in order to jumpstart your debt snowball. If you are not willing to part with anything, you may consider picking up a few extra hours at work or getting a second job for a bit to get your debt snowball going. The more money you can find to apply to it at the begging the more quickly you will be able to see the positive affect it is having on your debt.
Join us next week, as we tighten your budget and make it work. Have a great weekend.