How to Pay Off Debt Efficiently

Many people want to pay off their debts quickly, but the fastest way to do that is to pay off your debt efficiently - and few people seem to talk about that. The most efficient way to pay off your debt is with a "snowball effect," and a spread sheet program is the best way to keep track of that.

Difficulty: Moderate

Instructions

Things You'll Need:

• Spread sheet program
• List of every single monthly bill, interest rate, and your normal payment amount
• A strict plan that you follow to the penny

1. Get every single debt that requires a monthly payment. This doesn't include things like utilities that vary, but actual debt. Credit cards, car payments, mortgage payments, computer bills, anything financed, student loans, etc.

2. Open a spread sheet file and type in a name for every one of the bills on the top line, moving vertically so the rows are open. Place the amount owed on each, followed by the interest rate in the next column so a row reads: BILL NAME - $$ OWED - INTEREST RATE.

3. The next three columns (in order) should be: Minimum payment, payment allocated, & "difference." Difference is the difference between the minimum payment due, and the actual amount you pay each month.

4. Punch in all the numbers. Look at your bills, and see which should be prioritized. In general, larger interest rates should be top priority, and the smallest interest rates should be the bottom priorities, but you also want to eliminate debts that are easiest to pay off. For example: if you have $4,000 at 28%, $2,000 at 33%, and $500 at 18%, you still want to pay off the $500 first. Why? Because the moment you're done with that bill, the money you were paying there gets rolled over to the next debt to pay off. This is called the snow ball effect.

5. Use the snow ball method. You should pay the minimum payment ONLY on every single debt EXCEPT for the one that you are trying to immediately pay off. To figure out how much you pay, add up the "Difference" column. Add that number to the minimum payment for the first specific debt you've targeted to pay off. Continue until debt A is paid off.

6. When debt A is paid off, that's not "extra money" you have now. Look at the next debt and immediately move to debt B. So for example, if you were paying off debt A with $77 a month, then it's paid off, you add $77 + minimum payment for debt B for the new payment amount. When B gets paid off, it's A+B+minimum payment for C to get your new total. Every payment amount for a new debt should be higher than it was for the previous one. This is called the snow ball effect to paying off debt.

7. You can always pay more, but ONLY pay that extra off on the debt you're working on. Many people try to pay a little bit extra on all their debt: but if you took that money and knocked them out one at a time this would be a much more efficient way to pay off your debt, and it pays it off much sooner - even paying the exact same total amount every month! When a friend first showed me this, the difference between snow balling my payments and spreading them out was 8 years to pay off everything versus 17.

8. If you're a numbers person who gets encouraged by small amounts, open a second spread sheet with each debt name listed horizontally, and dates listed vertically. This way you can keep track of the actual number changes even as you stay with the snowball debt payment plan.

9. Keep at it. If you focus all extra money into one debt, then roll over the money that frees up into the next, it really does have a snowball to avalanche effect that will help you pay off all your debt much sooner!

Tips & Warnings

• If you have a bunch of little accounts, knock them out early so you can roll those extra minimum payments into a bigger debt.
• If you don't have the small debts to hack up, go by interest rate.
• It's tempting to spread the payments out among all your debts. DON'T! Either you'll start paying less than the debt you were trying to pay off, or you're wasting that money that could be knocking down the immediate debt even faster.

Resources

• Debt Cures They Don't Want You to Know About

[writedesign]

on 2/13/2009 This is a great article for folks who have a lot of debt. I was there once. Everything I had went to bills, I worked 3 jobs and didn't buy anything new for 2 years unless it was food or medicine. The debt is now completely gone.