I know people that pay off debt, large amounts of debt, monthly that never make a dent. I was speaking to a close friend of mine, who is in his high 20's) that has about 10K of credit card debt. He was asking how I handle my finances. I will share what we planned for him.
1. Sign up for mint.com to determine:
1. His total income
2. His total spending
3. His month to month net income
You must take in more then you spend before attempting to pay off debt. Sounds simple, but this is where most people fail before they begin.
2. Transfer balances or negotiate lower rates on credit card debt.
1. He transferred 5k to a 11.99% rate with 12 months at 1.99% interest
2. He negotiated his 29.99% rate down to 13.99%
This can be as simple as a phone call. This action will save my friend $1,954.50 if he only paid interest over a year.
3. Make a hard and fast budget with mint.com. This is an easy process and he now can be aware of how much he is spending on day to day goods. Make sure to pay down debts with the highest interest rate first. This may seem obvious, but most people do not follow this rule as Dan Ariely explains. You will be able to know you are ahead of the masses.
d Before you begin paying down your debt please amass a emergency fund. If you do not do this you have a very high probability to fall back into the debt spiral. I cannot tell you what is reasonable for your emergency fund in your specific situation. It could be $1,000 dollars. It could be ten grand. Just scrape together enough cash that you will not need a credit card if your car's alternator dies. This is absolutely critical. You now have become your own insurance company. The best part about this policy is that you get paid interest rather then paying a premium. A true win-win in today's world.
4. Finally, use all of your surplus income to pay down your debt. I get the free, fairly crappy, coffee at work. Each time I don’t purchase a coffee from Starbuck or Dunks I transfer two dollars to a savings account. This is made easy with mobile banking. He is going to do the same when bringing his lunch to work. So each time he brown bags it, five dollars will be paid to his credit card. If he brown bags it three times a week he will pay off an extra 780 dollars a year. At his old credit card rate this would eliminate $1013.92 of principal + interest payments he will no longer make. When you pay off one card do not reduce your monthly payments (you have been living without this money already) transfer all the money from the old payment to the next debt with the highest interest rate.
It is hard, very hard, to get out of debt, but following a basic process can make this seem automatic.
- Digging Out
debt system. systematic debt repayment debt negociation
