Things You'll Need:
- Excel (desirable)
- Google Docs (optional)
- Will to succeed
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Step 1
The do-it-yourself method I describe in this article works and works well, as I can attest to from my own experience. All you need to do is to set up a budget and follow a "snowball" method of debt reduction.
Snowball debt reduction is a method where you choose the order in which your debts will be paid and how much to pay. Money paid above the minimum is the "snowball". As the debts are paid off, the snowball increases by the amount saved by paying off the previous debt. The snowball grows as the debts are paid off until you are out of debt.
It may be difficult to follow a budget, but this is essential to paying off debt. Seeing the credit card balances go down is exciting and makes following a budget worthwhile. -
Step 2
Ads that state "Have most of your debt forgiven and be debt-free in 6 months." are usually a rip-off. Try going the do-it-yourself route before asking for "professional" help.
Many, if not most, of these ads are for services that will cost you a lot of money for bad results. If they want money up front, go somewhere else.
Some of these people set up up an account into which which you must make payments plus pay a fee to the "debt consolidator". The idea is that after 6 months their efforts will result in most of your debt being forgiven by the creditors.
What do they do? Many of them just hold the money in the account and pay nothing to your creditors. After 6 months of non-payment, the creditors will write you off as a bad debt and report you to the credit bureaus.
You now have a BAD credit report for the next 7 to 10 years, plus you will now owe income taxes on the forgiven debt. You have just paid good money to get into deeper financial trouble. -
Step 3
At the end of this article, under Resources, you will find a link to "Google Docs Sample Budget". After reading this article, go ahead and play with this budget. Just don't save your changes when you exit, so as not to mess up the spreadsheet for the next person.
If you like the format of the budget, you can save it to your computer and then either run it in Excel or upload it back to Google Docs. If you upload it to Google, keep your information private. Detailed information on Google Docs will come at the end of this article.
This budget is along the lines of my own budget which I have been using for the past year. Only the spreadsheet entries are different. You will find that changing values, adding lines and deleting lines will give a different summary result at the bottom right. -
Step 4
Once a budget is worked out, you may set up a "Snowball" method of paying off your cards.
At the end of the sample budget, there is an item called "Snowball" This is the extra payment that will be applied to the first debt you wish to pay off. When that debt is paid off, the snowball will increase. Add the new Snowball to the next debt you wish to pay off and so on until all the debts are paid off. -
Step 5
If you have access to Excel and wish to use a great free Debt Reduction Calculator, this is a wonderful addition to use in combination with your budget spreadsheet.
The debt reduction calculator will not run in Google Docs. It requires a copy of Excel running on your own computer. If you don't have Excel, inexpensive copies of Microsoft Office are available on the Internet. -
Step 6
I placed a sample budget on Google Docs which can be edited by anyone.
To test the budget or download a copy of this Excel spreadsheet, click on "Google Docs Sample Budget" listed at the end of this article under Resources.
Instructions for use of the Budget are located at the bottom of the spreadsheet.
Lines may be added by right clicking on the left most column line number and inserting a line.
Lines may be deleted by right clicking on the left most column line number and deleting the row.
Any entry may be changed by overwriting.
To download a copy of the budget spreadsheet to your computer, follow the instructions at the bottom of the sample budget.
When exiting the sample spreadsheet, please don't Exit and Save. Just quit so as not to change the sample budget. -
Step 7
Having a budget is essential to any debt reduction program.
The spreadsheet contains the following sections:
Credit Cards:
List your credit cards and other debt by name.
The due date and pay date are payment reminders.
The interest rate is necessary to compute the snowball payoff - if you use the Debt Reduction Calculator.
Credit line is for information only.
Current Balance is necessary when starting the Debt Reduction Calculator.
Minimum Payment is required by the Debt Reduction Calculator.
Balance is sum of minimum payments listed as debt.
Snowball is the extra payment you wish to pay on a selected card.
NEVER be late on a credit card payment. If you are 1 minute late, the bank will raise your interest to the limit allowed by law. I use my bank bill pay services to automatically pay all repeating bills. This way, I won't forget to pay on time. -
Step 8
Income:
All calculations are based upon monthly take-home income.
If your salary is not paid on a monthly basis, calculate what the take-home pay would be would be if paid monthly. For example, if you are paid weekly, multiply the amount by 4.333 to obtain the monthly amount. If paid every 2 weeks, multiply the amount by 2.167 to obtain the monthly amount.
If your income varies, calculate an average monthly income.
Enter your monthly income on the spreadsheet. -
Step 9
Annual Expenses:
These are expenses that are not paid monthly, but are paid once per year or or some other long period. A set-aside must be made every month to cover these expenses. I like to list the dates the payments are due and the date I wish to make the payment as a reminder to my poor memory.
The set-asides MUST be saved every month. A convenient way to be sure these set-asides are saved is to set up a Pay Pal account and make the deposits automatically every month. PayPal transfers may be made to and from your bank in 5 days or so at no charge. -
Step 10
Monthly Expenses:
This is a list of all your monthly expenditures. Change the spreadsheet to fit your situation and don't overlook anything. Some of these will be estimates, but these estimates can be refined over time.
I like to make recurring monthly payments, such as credit cards, automatically through my bank bill pay service, so I will not forget to make the payment.
The bank bill pay service service is free at my bank and I save the postage and time spent writing checks. -
Step 11
Balances:
Each section has a balance. Each balance is carried to the balance column as either a monthly debit or credit. At the bottom right there is a summary:
Cash surplus: This is the cash left after making all payments and set-asides. Try to formulate a budget that will give as large a cash surplus as possible. Get creative and sacrifice a little with the budget.
Snowball: This is the portion of the cash surplus you wish to apply as an extra payment to credit cards or other debt. Obviously, you would wish to make the snowball as large as possible.
To Savings: Never use a credit card for emergencies. We are trying to get out of debt - remember? This money goes into a savings or PayPal account to cover emergencies. Make the snowball as large as possible, but be sure to have something go into savings.
Any change you make to your spreadsheet will carry through to the balances. This will allow you to see immediately how your frugality will affect your snowball and savings. -
Step 12
Try to cut your expenditures wherever possible. In the sample budget, try to cut the following:
Telephone: Do you really need a cell phone? How about getting a Magic Jack for your home phone?
Vacation: Make it as inexpensive as possible. Maybe stay at home?
Car Insurance: Pay off auto debt and drop collision insurance.
Entertainment: Cut down - watch TV or enjoy each others company. Do you like movies? Sign up for Netflix (1 movie at a time) and buy the Roku box for $99. You can watch all the instant movies you want by downloading streaming video from Netflix with the Roku Box. Broadband internet is required for both the Roku Box and the Magic Jack telephone, but it will save money in the long run.
Go over your entire budget and cut expenses wherever possible. That money added to the snowball will greatly cut down the time required to pay off the credit card debt. I constantly review and modify my budget. The spreadsheet will take care of all the calculations required to give the totals. -
Step 13
Now that you have a preliminary budget, download the free Debt Reduction Calculator if you wish to use it. This is a popular free program that runs in Excel. Just do a search for "debt reduction calculator" and you will find several links to it.
There are various payment scenarios to use, such as highest interest first, lowest balance first or custom sequence.
I prefer the custom sequence of payoff because I have a 3.90% Discover card that will be raised to 18% in the near future. Obviously, I want that card paid off before the rate goes up. -
Step 14
With perseverance you will be out of debt as soon as possible while keeping your good credit.
Good luck.
