Pay off debt

So you've decide to pay off some debt, or you realize you have to in order to survive. How do you accomplish this monumental task? First, reduce your expenses as much as possible. Then, stop charging things. Live on your income alone. This can be hard, but you must learn to do it or you'll never be out of debt - and it is a wonderful feeling to be completely out of debt!

First make a list of all your expenses and income (a budget). Then break out your debt in decending order of monthly payment, as this example shows:

The mistake most people make is to send a little extra to each creditor in order to pay down the debt. The problem with this is that you can't see it ever reducing the debt.

Let's say that after you pay the minimum payments, and you've cut your expenses as much as you can, you have $25 left over.

Instead of sending $5 to a few different creditors, send an additional $25 to the last one on the list - in this case the collection agency. By sending them the extra money, you'll have that debt paid off in 7 or 8 months. And the others will not be going up in amount as long as you have stopped going into additional debt.

When the last creditor on the list is paid off, now you can add that amount the next lowest monthly minimum. In the example you'd now be paying an additional $50 to the Furniture company, for a total of $80 per month. This would then be paid off in about a year. At which time you starting paying more on your Mastercard - now it's $135 per month you're paying. The Mastercard will be paid off in about a year. And up the list you go.

If you continue this way, and try to reduce expenses even more as you go, plus you may receive cost of living increases to your income, you'll have everything paid off before you know it.

In addition, each time you completely pay off a creditor, you will have something to celebrate - don't spend money on the celebration though - and you'll have one less bill to write every month, and use one less stamp, one less envelope, etc. (hey, it all adds up over time).

Assuming you get no raises, and can't reduce expenses any more than you've done to get the original $25 per month, and following the above example, you'll pay off Visa in about 2 more years, Sears in another year, the Truck within the next year, the car in about 10 months, and the mortgage in less than 10 years. Thats a total of 17 years to be completely out of debt.

Remember that you started $185,000 in the hole! Making minimum payments of $2,135 per month. And in just 7 years you owe nothing but the mortgage.

I've taken into account interest, however the figures are not exact, because different creditors will charge different interest rates. The point though is the same, work from the bottom up and pay as much as you can extra to the lowest minimum monthly payment.

There is one exception to this however. Say, for example, that the Furniture company is charging %20 while the collection agency is not charging interest at all. It makes more sense to pay off the Furniture company first. But this only applies when the minimum payments are close to the same and the interest rates are a lot different. I would not do this if the Furniture was 12.5% and the collection agency was 10% for example. Nor would I pay off the truck before the Visa card if the truck interest was 12% and Visa was 9% - because the Visa would still be paid off faster, and there is a huge feeling of comfort in knowing that you've paid off one creditor.

More finance tips

• Permanent files What to store in your permanent file.
• Safe Deposit Box What to store in, and how to get, a safe deposit box.
• Filing Checklist How to develop a filing system, either to start a new one or improve your existing one.
• Other Files What to else to keep in files.
• Budget Keeping a budget.
• Medical Records What to keep, and what to do with medical records.
• Home Inventory Creating and maintaining a home inventory file.
• Car Purchases The most efficient use of your money when purchasing a car.
• Phone Book An organized personal phone book file system.
• Keeping Records Where to keep records.
• A home office Setting up a home office.
• Home Office Running a business from home.
• Banking Banking, savings, checking, and other bank accounts.
• Balance the checkbook How to balance a checkbook.
• Interest What interest can do for you or to you.
• Bad checks How much a bounced check really costs.
• Tax refund What to do about tax refunds, how to calculate what to have taken out for taxes during the year.
• Pay off debt How to get out of and stay out of debt.
• Cutting Expenses Ideas for reducing expenses as much as possible.
• Investing Making wise investments.
• Credit Cards Making wise use of credit cards.
• Debit Cards How to use debit cards.
• Finances and records Getting started with your finances and records.

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