Debt Elimination Plan
So you have acquired some debt and you want to create a plan to pay it off. There are a number of ways you can choose to go about paying off your debt. I think the most financially prudent way to attack multiple debts with different interest rates is to attack the highest interest rate debt first. It's even more helpful if you can rearrange your budget to free up some cash to throw at your plan. As each debt is eliminated, you take it's former payment and add it to the next highest interest balance. You just keep doing this until all your debt is gone.
Another method, which is endorsed by radio talk show host Dave Ramsey is the
"Debt Snowball method", this is where you payoff the smallest balances first. Using this method you see your debt eliminated faster, which could help keep you motivated. In this method the interest rate is not a concern, Dave advises that if you have two debts with the same balance, then payoff the higher balance first. The idea of the snowball is simple: pay minimum payments on all of your debts except for the smallest one. Then, attack that one with gazelle intensity! Every extra dollar you can get your hands on should be thrown at that smallest debt until it is gone. Then, you attack the second one. Every time you pay a debt off, you add its old minimum payment to your next debt payments. So, as the snowball rolls over, it picks up more snow. Get it?
Emergency Fund is Key
One of the biggest key to keep from adding more debt in the future (in addition to making smarter choices as it relates to incurring more), is to have cash in the bank. This way, when the unexpected happens you'll have cash to pay for it rather than needing to revert to credit. Most financial professionals recommend having an
emergency fund of 3-6 months' worth of your monthly expenses, but when you have a lot of debt, a smaller goal of $1000 can be a great place to start.
Whatever method you choose to eliminate your debt, the key is to remain consistent, stay focused and stick to your financial goals. In a very short time you will create unbelievable and unstoppable momentum.
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