7 Steps to Getting to Debt-Free
There’s no magic to getting to debt-free. It takes discipline and determination. And it’s hard work. It might have been easy to spend your way into a hole – cachunk cachunk – but digging back out won’t be the same walk in the mall!
1. Take stock of your debt situation: Make a list of all the places to which you owe money, except for your mortgage, unless you’ve consolidated consumer debt in your mortgage. If so, then add the amount you consolidated to your list.
2. Prioritize your debt: List what you owe by interest rate with the most expensive (the highest rate) at the top of the list. This is the order in which you’ll pay off the debt.
3. Calculate the minimum payment on each debt. That’s what you HAVE to pay to keep current and not bruise your credit history. Write the minimum payments beside each debt, add them up, and that’s the least you can put toward your debt every month.
4. Figure out how much to repay to get out of the hole: If you owe $2,500 on your credit card at 18% and you want that credit card debt gone in six months, you already know it’s going to cost you $37.50 a month in interest. But if you want to get that credit card paid off in six months, you’re going to have to slap about $417 a month against the principle to make it go away. That’s a total of $454.50 a month you’ll have to come up with to make the credit card debt disappear in six months or less. Once you’ve paid off the credit card, you can use the $454.50 you were using to pay it off for your next most expensive debt. That’s called snowballing..
5. Decide where you’re going to get the money: If you want to be debt free, you have to find the money to pay off the debt. It may mean going over your budget with a paring knife. It may mean finding a way to make more money. You’ll do whatever it takes.
6. Make your debt repayments automatic: Set up an auto pay for each debt you’re working to pay off, taking the guess work out of it, and making a firm commitment to the process. Initially you’ll pay the minimum required on all the debt. On your most expensive debt, you’ll auto pay the amount you came up with to have the debt gone by your Debt Freedom Day.
7. Chart your progress: Create a chart that shows how much you owe. You can use boxes or a thermometer graphic. Whatever works for you. Each time your auto pay goes through, colour in one of your boxes, or move your marker up the thermometer so you can see the progress you’re making.