LWM

Eliminating Credit Card & Other Debts:

In my last blog I told you that my second goal (first goal was $1,000 emergency fund) was to be debt free except my mortgage, car payment & student loan. I experienced a blow to my plan when I had to replace my Air Conditioning at a cost of approximately $7,000 but was still able to meet my goal. I am sure you want to know how and I am now going to tell you…

Debt reduction is critical to having financial peace of mind, when one has debt it is hard to see clearly what the future can hold as we are always under a cloud. Here is how I eliminated approximately $25,000 in debt in a little over 16 months:

I robbed a bank! Well not really but the way bankers complain you would think I robbed a bank.

The first thing you need to do is make a list of ALL your debt except you mortgage, this list should include credit cards, line of credits, car payments, student loans, payday loans, and money you owe anyone.

Now list then out on a piece of paper with the smallest loan on the first line, make sure you record who you owe the money too, what the outstanding balance is and what the minimum payment due amount is. Then list the next smallest and so on until all your debt is listed with the largest debt on the last line.

For budget purposes you will need to have each of these items listed on your budget form and the monthly amount due should be what ever your minimum payment due amount is according to your statement. As previously suggested I would encourage you to list all of these items in the same area of your budget so you can work the next suggestion easily and see the debt melt away.

Until you have your small emergency fund fully funded at $1,000 you should pay no more on these debts then the minimum amount due, this is important as you will soon see. Once the small emergency fund is fully funded I want you to take the amount you were paying into that fund and add it to the minimum payment due on the smallest debt you have.

FOR EXAMPLE:

Emergency fund $50 per month

Debt 1 – minimum payment $75
Debt 2 – minimum payment $125
Debt 3 – minimum payment $190
Debt 4 – minimum payment $289
Debt 5 – minimum payment $ 365

AFTER EMERGENCY FUND IS FULLY FUNDED:

Debt 1 – minimum payment $75 + $50 (what you were putting into emergency fund) = $125
Debt 2 – minimum payment $125
Debt 3 – minimum payment $190
Debt 4 – minimum payment $289
Debt 5 – minimum payment $ 365

You will continue to pay $125 per month on that debt until it is paid off while continuing to make the minimum payment on all your other debt.

When the smallest debt is paid off I want you to take the $125 you were paying on that loan and add it to the debt 2 minimum payment ($125) making a payment of $250 per month and when that debt is paid off you will add that $250 to debt 3 minimum ($190) payment making a payment of $440 per month and so on until the last debt is paid off.

I think you can see from this example that it will not take as long as you thought to pay off your debt. I did it in 16 months so what are you waiting for?

Feel free to send me a PM if you have questions or you can add them to the comments section if you feel others can benefit from the discussion.