Monday, June 21, 2010

Money Sense- Step three of getting out of debt

Click here for previous weeks in this series.

Step Three- Creating a Debt Pay-down Plan
 Even if you are living within your means and have created a budget, you will not get out of debt unless you come up with a plan to do so. Below are the steps to create that plan.
  1. If you haven't done so already, lock up your cards. One popular way is to freeze your cards in ice. Do whatever you need to do to stop using them.
  2. Collect information on all current debts. You will need current balance, minimum payment, current payment being paid, and interest rate.
  3. Head over to this calculator and enter in all of your debts. I'd enter all debts including credit cards, loans, student loans, lines of credit, mortgages, car loans, personal loans, etc. The reason I include "good" debts like student loans and mortgages is to show you how much time you can cut out of paying debts, however it is entirely your choice on paying down these debts sooner than their terms based on personal preference or circumstances (for example you may not want to pay off your mortgage if you know you will move in a year). 
  4. Click the submit button. You will see the results of a roll-over plan. The basis of the roll-over plan is once you pay off one debt, you roll-over the payment from that debt to another debt. 
  5. Play around with the additional payments section. Enter in different values of money into the extra monthly payment. Press the submit button again and see how they affect the results. You may be surprised how much an extra $5, $10, $20, or more a month could do.
  6. Play around with the one-time payment section. This is a good section for unexpected sums of money such as bonuses, inheritance, or gifts. You can look at the detailed section to see where it places the payment.
  7. Play around with the assumptions. It assumes you want to pay down the highest interest rate first. The reason for this is to save you money in interest over the long run. You can also choose to pay off the lowest balance first. This is a good choice if you need to see results to stay motivated. The final option is shortest to longest payoff period. This one is very similar to paying to lowest balance first. The only difference in this one is if for some reason a card has a higher minimum payment ratio you will end up paying it off faster than one with a smaller balance. 
  8. Play around with the interest on savings. This will show you what you will make on the money once you pay off the debt and put the same amount in savings. 5% is an average, your interest will vary depending on how aggressive or conservative you are about your savings.
  9. Make a decision on all the options. (Whether you want to add more to your minimum payments, add a lump sum payment, and which order of pay-off you prefer)
  10. Print (ctrl + p) the page.
  11. Voila! You now have a debt pay-off plan!
  12. Return to it regularly to update and adjust. You'll want to come back if you ever receive a lump-sum of money, if your interest rates go up, or if you can find more money in your budget to add to your monthly payments.
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