The formula for getting out of debt is a slight variation on the formula that I shared yesterday. Check it out if you haven’t seen it…
Getting out of debt is also a simple formula. It can be fun if you decide to make paying your debts off as fast as possible a game.
- Earn money. The first step of pretty much every financial goal. A key ingredient is money and I recommend earning it rather than stealing it or waiting to inherit or hoping to win the lottery.
If you want to pay off your debts faster, pick up a second source of income. A part-time job, freelance gig, etc.
- Save more of what you earn. Another way to pay your debt down faster is to find ways to spend less of your earnings each month. Check out your local thrift shops. Eat leftovers instead of going out to eat so often. Use coupons at the grocery store.
One other area to save that can be a biggie is the interest on each loan. Often you can negotiate the interest rate lower if you call and ask for the supervisor.
- Grow the payments. Here’s where the game gets fun.
Take as much money as you can live without each month and use it to put an extra amount on the highest interest loan you have. Let’s say you have the following loans:
- $5,000 @ 12% interest, $100 pmt
- $2,000 @ 8% interest, $40 pmt
- $7,500 @ 18% interest, $150 pmt
In this example you would pay extra money on the $7,500 loan each month. If you can earn and save an extra $750 per month and apply to the $7,500 loan, you’ll have it paid off in less than 10 months.
Now take that $750 extra per month, plus $150 (the regular payment you were making on the $7,500 loan) and put that $900 against the $5,000 loan each month. You’ll be free of that loan within five months.
Now take the $900 plus the $100 and apply against the $2,000 loan. All paid off in another couple months.
This example will change according to how much money you can generate from earning and saving each month, but now you know the rules of the game.
There is one advanced strategy that I hesitate to talk about because it is misused so often. If you promise to use it responsibly, I’ll let you in on a tactic that I used to get out of my debts quicker.
If you have decent credit, you can often get teaser rates on new credit cards. Teaser rates range from 0% to 5%. Even 10% can be a good deal if you’re paying over 20% currently.
Sign up for the new card with the teaser rate, then transfer your existing high interest debt to these cards to take advantage of the teaser rates while you’re attacking the debt.
Now here’s why this is an advanced strategy that can bite you if you are not EXTREMELY careful:
Watch the transfer fees. Sometimes the new credit card company will charge a fee to transfer the balance. This fee can be more than you would pay in interest. Factor the fee into the monthly interest over the time you expect to pay it off. Is the rate still lower than you’re currently paying?
If you make a late payment, the credit card company will jack your rate up to an astronomical rate (20%+) instantly. Set up payment via electronic transfer from your bank and watch it closely each month.
Also teaser rates are only low for a limited time. After that time, the rate will JUMP. Be careful to pay off the card before the jump or transfer it to another card with teaser rate.
Human nature is often how you got into debt to begin with. It’s tempting to slip into bad habits when you use one card to pay off another. All of a sudden you have an empty credit card…so many things you could buy. =)
These are all strategies my wife and I used to get out of debt over the years. I seem to learn everything the hard way. I’ve tried out all sorts of debt…college debt, auto loans, consumer debt, credit card debt, business loans, family loans. I love the feeling of having none of that now. We are now down to a small mortgage and no other loans.
Do you have any debt stories? How about freedom stories of getting out from under the debt?