Paying off your debt

Posted by PhroBoy - Financial Wonderboy | Site News | Wednesday 10 November 2010 9:01 pm

This post will primarily help those trying to pay off credit card debt.  

Credit cards can be wonderful things – to the right person! Some cards offer points and rewards just for using the card. However, if you do not pay off the entire statement balance before it is due, you will pay interest and give up potentially any benefit you gained. My tip for credit cards is to use it like cash. If you don’t have the cash to pay off your credit card right away, just put your credit card back in your pocket.

If you have credit card debt, the first thing you need to do is to get rid of your credit cards – stop charging! You have to stop in order to get better. Create a budget and set how much money you will set aside each month to pay it off. Be ready to struggle because you have already lived easier than you should have when you got yourself into the credit card debt in the first place. If you only pay the minimum balance, you will never pay the card off and the interest will keep accumulating.  Track every dollar your spend, and you’ll be amazed at where you’ll be able to save.  Here’s the priority list: pay God first (>10% – be charitable!), pay yourself second (20% is preferred – savings and paying off debt money), and the rest can be used for all else.  Follow this order and you’ll be amazed at the freedom you’ll have!

Now that you have stopped charging against your credit and set a budget, you are ready to pay your debt down in the most efficient manner possible. The key is to pay off your highest interest rate first. Look at all (credit card, auto, student loans, etc.) debts and organize them from highest rate to lowest rate. Now that you have all of your debts with the interest rates lined up, put in the minimum payment that is required for each debt. This is now your base so you know how much you have to pay off each month.

You have budgeted how much you are going to sacrifice each month to paying off your debts, so you take the amount left after all the minimum payments and use it to pay off the highest interest rate first. The more you can set aside, the quicker you can pay off your debts. Once you have paid a card, don’t make the mistake of charging more on it. Avoid your highest interest rates like the plague. My friend Patrick likes to say he is like a Gazelle to get out of debt. Be a Gazelle – get out of debt!

If you’re really serious about getting out of debt, here is a site set up by my personal finance professor from college to help people manage their finances. Here is a file to help you set up your budget and line up your debts for you in priority of how you should pay it off. I’ll deal with setting up budgets in another post.

Remember, if you’re in debt, you have to change your behavior. You’re a slave to a creditor. Whether you could avoid it or not, you have to change the way you live to make the situation better. Don’t buy a new car when you can buy a perfectly good used one. Don’t go out for lunch when you can just as easily make yourself a sandwich. Don’t use more of your credit when you’ve already abused what you’ve been given.

My wife and I would like a mini-van or perhaps an SUV because it would be easier to get our kid in and out of the car and to take trips. We have been living off of one car through car-pooling and public transportation since we have been married. We might be getting a new car, but the only car we can afford to pay cash for is one that costs $1,500 and works just fine. Taking a lunch to work everyday gets really old, but we do these things because we know in the future we can start to live without the burden of debts and with the satisfaction of knowing we are living within our means.  It may sound like life sucks, but avoiding debt is freedom and happiness.