Being in debt can put a hold on your financial life. You may feel like everyone gets to enjoy your money but you. And for now, that may be true. If you take aggressive action against your debt, you can work towards becoming debt free and begin enjoying your hard-earned money.
When you make a decision to get out of debt, the first thing you need to do is take inventory of all your debt. You should figure out who you owe and the total amount you owe them. Because we’re not all the organized type who keeps all bills in color coded file folders, it might take a little longer to make such a list.
Start by gathering past statements from your creditors and lenders. If you haven’t been saving these, begin collecting them as they come in the mail each month. Put them in all in a single envelope or folder so they’ll be together.
Once you’ve collected all your recent statements, compile a list that includes the name of the creditor, total amount owed, minimum monthly payment, and interest rate.
You can choose to pay off your debts in a few ways: highest to lowest by interest rate, highest to lowest by total owed, or lowest to highest by total owed. Indicate which debt you’re going to pay off first, which you’ll pay off second, and so on.
Now comes the tricky part, coming up with the money to pay off these creditors. If you have extra money in your budget each month, this might be easy for you. Otherwise, you’ll have to do a little budget analysis to see where you can reduce your spending to pay off your debts. The object is to come up with as much money as you can to pay off your creditors one by one. We’ll call this amount your payoff allocation.
The way this plan works is this: use your payoff allocation to make the minimum monthly payments on all your accounts. Send everything that’s left over to the creditor that’s on the top of your list. If you get any sort of windfall – tax refunds, rebates, inheritances, etc. – send it to your number one creditor. After you’ve paid off that creditor, do the same process with the second creditor. Keep at it until you’ve successful paid off every single creditor and lender on your list.
It might take a few months or even a few years, but the freedom you’ll feel once you’re finally out of paying high interest bills will be well worth it.