So, if you’ve read any of my other posts on personal finance you’ve likely figured out that I think debt (that doesn’t make you any money) is bad.  If debt is bad, and you have it, then you’re goal should be to get out of it!

How to get out of bad debt…

There are two mainstream thoughts on how to get out of debt.  The first, and mathematically most advantageous method is to tackle your highest interest debts first, then then second highest interest debt, etc… etc…

The second thought is championed by a gentleman named Dave Ramsey and tackles the psychology of  debt by tackling the lowest balance item first, then the next lowest item etc… he calls this the “snowball” method.

Paying it down

It doesn’t matter which method you pick, the overall model is the same.  After building your basic budget, you’ll have an understanding of what money is “extra” and available to pay down your balances.  Of course your basic budget will have to include the minimum payment on all of your debts, and I’d recommend a little bit of flex in the budget if you’re new to this.

Once you’ve identified the amount of extra money that you can apply to your debts you focus in on your first target debt.  If you have $700 to cover you minimum payments and another $300 to go against principal (extra payments) you will continue to pay the total amount of $1,000 in debt repayment every month until all of your debts are gone.   The trick is that you focus in on a single debt at a time to try to remove them as fast as possible.

If you had two credit cards and one car loan, you might pick the first credit card to pay off.  In order to do that, you’ll pay the minimum payment on the other credit card and the car loan.  On your target credit card, you’ll pay not only the minimum payment, but you’ll also add your $300 extra payment each month until the card is paid off.  Once that first card is paid off, you’ll take all of the money you had been using on credit card one, and apply it your to next target debt - likely the next credit card.  Do this over and over until you pay them all off.

Which method to choose?

That’s a really good question, and a lot of it has to do with you.  If you’re already completely committed to paying down your debts and you understand the principals, you might want to go with the mathematically advantageous method of paying higher interest debts first. However, if you’re new to this whole thing, you might do well with Mr. Ramsey’s “snowball” method.

The real benefit to paying down your lowest balance item first is completely psychological. There really is a fantastic feeling that comes with seeing a balance hit $0, then watching the next one come down really quickly - because you now have more money to pay it down!  In the end you’ll end up paying a little more interest but you will get them paid off.  If the choice is between never paying them down, and getting out of debt - I’d suggest anything that works for you to get out of debt.  This may cost you a little more in interest, but a lot less than never getting out of debt at all!

My experience

I’m not totally out of debt - yet. However, I don’t carry any credit card debt, and all of my debt is at a very low interest rate.  In a previous post, I wrote about owing money on a car and a student loan.  Right now, Megan and I are focusing in on the car loan and will have it paid down in just a few short months.  This debt also happens to have the higher interest rate so I’ve picked the mathematical model for myself.

However… Before I really got serious about paying down debt I carried a few rotating credit cards all the time.  I’d move money from card A to B and not think twice about it.  Eventually, we had more than $500 a month in minimum payments due.  What the heck was that all about?

After looking at our options, we focused down and started to tackle a single credit card debt.  These debts where all “low rate” balance transfer things, so at least we weren’t getting hammered by 18% plus rates.  Our debts where sitting at about 4.9% or less… Anyhow, after focusing in on the debt repayment, we were able to knock off the first card and it was a fantastic feeling!

All of the sudden we weren’t required to pay $500 a month to the credit card companies and we had more money to spend/save/invest/tithe etc… This feeling was fantastic and we dialed into a second debt.  After paying that off, we started to spread our cash around build up a nice savings buffer while still tackling some other debts, with a little less focus.

Now, we are back to the focused debt repayment and have allocated a specific amount to hammer down on our debts each month.  We also add additional money to a savings account, 401k and tithes so we could pay our debts off earlier, but there are things that are more important to us than paying down a few months earlier. The greatest thing that I’ve experienced in this journey is the freedom to do what I want with my money.

After paying down just a few debts, we’ve been able to invest a lot more, save a lot more, tithe a lot more and do much more with the income we’ve been blessed with.  I hope you’ll take a few minutes to review your situation and get out of the stranglehold of debt!  Good luck!

Categories: Personal Finance