J is in a debt hole and needs help getting out. We’re going to give it to him:
We are pretty smart people who did some pretty stupid things and now we are just trying to get out of debt. We know exactly what to do in the future to manage our spending, savings and credit score. And we both agree that nothing is worth putting on a credit card if we cant go home and transfer money to the card to pay off the balance when we get home. But that doesn’t change the fact that we are currently facing a staggering mound of debt and see no end in sight.
J, you’ve got two choices:
To pay off your debt you will need one, a method, and two, a madness. First, pick a method: Snowball, or Highest-Interest First.
SNOWBALL
1. Commit yourself to making the minimum monthly payment on all debts
2. Figure out what extra amount you have in your budget to put towards debt repayment
3. Take your lowest amount bill
4. Pay the minimum plus the extra on that bill until it is paid off
5. After it’s paid off, put all the money you were putting towards that bill to the next lowest bill
6. Repeat until out of debt
HIGHEST INTEREST FIRST
Do the same thing as above, except choose your debt with the highest interest first.
PROS, CONS: Many people find the snowball method to be the more psychologically gratifying. The highest-interest first method will result in you paying off the debt faster and at a lower cost. If you get depressed about your debts and it demotivates you from paying it off, the snowball method might be better to go with if it keeps you on track better.
NOTE: It’s important to make sure you’re current with all your lenders. This means making regular payments and not dodging their letters and calls. They’re not just going to go away like a CD-of-the-month-club, they, or the shady debt collectors they sell your debt to, will keep after you until you pay up or declare bankruptcy. If you don’t have enough to make the minimum payment, try calling and negotiating for a lower one. They’re willing to work with you if your payments are regular and scheduled and lower than if they’re getting no money at all.
HANDY TOOL: Whichever method you use, this free Excel spreadsheet can help. Just enter your credit cards, their balance, and interest rate. Then enter your required minimum monthly payments and the maximum possible amount you could put towards it, based on your budget. Select which style of repayment you want, such as snowball or highest interest first. The program then spits out an effective payoff strategy. It calculates how much interest and the total you’ll end up paying, and how long it will take to get out of debt.
THIS IS SPARTA!
The deeper you’re in, the more hardcore you need to be about getting out. This is the “madness” to your “method”. Suffer, cut back, say no. For instance, you can cut up the credit cards and go cash only. Sell extra things around the house and use the money to pay off debts. Sell the car and get a beater, or a bicycle. Take on a second job or work longer hours. Maybe you even have to move back in with your parents while you pay off your debts. Whatever it takes, attack your debt like a hungry wolf. Intensity is the number one difference between those who become truly free and escape debt slavery, and those left staring out the prison bars.
Share your stories about struggling with debt in the comments.
(Photos: samwilkinson.org, kamshots)
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Last year I hit some unexpected unemployment after celebrating my new job and running up my credit cards. Then I had four mor motnhs of expenses added to those credit cards. Beginning this year, I ended up with close to 20k in debt. I sat down and cut back on all monthly services (internet is a utility! =p) and stopped going out for food. I did a week-to-week budget in excel, keeping a running total of money left over in my account as each bill was paid and my credit cards in a seperate column. I recently re-booted my budget using the above linked debt payment calculator, using the snowball method (I just paid off one card, and another is scheduled to be done next month) which is great for my personal outlook on finances, even though I know that higher interest first would save me a couple thousand dollars (I may switch in the new year). Either way, I’m doing exactly what this article has said, and it works.
DO IT.
I haven’t seen this suggested yet, but one thing that’s helped me is using the auto-payment feature that most credit card sites have for making a payment. What you do is set the payment amount above the minimum, the higher the better obviously, and just leave it at that until the debt is gone. Once you get used to that amount of money being paid out to the debt on that particular day of the month you don’t notice it missing as much. And the beauty is that as the balance goes down the amount of your payment takes bigger and bigger chunks out of the balance.
@IamNotToddDavis: That makes a lot of sense, especially if you (not YOU, specifically, but person in general) don’t have the discipline to make payments, or a high enough payment. But it does go against the unwritten (actually, maybe it is written somewhere) law of Consumerist that you should not ever, ever, sign up for auto-pay.
First thing would be to get rid of that horrible MBNA credit csrd. They suck something awful. I was at a Jets game and they were trying to get people to fill out applications for a Jet credit card at 22%. Jesus, the Jets suck enough without getting hammered for 22% just to have their logo on your credit card.
To pay off my debt, I worked my ass off. That should have been one of the suggestions.
I was three grand in CC debt until yesterday. I bit the bullet and sent off my savings to pay everything off. Now I’m taking that 200 I used to send them every month and putting it into a mutual fund for my retirement.
Well, spoken like an almost debt free recent grad, I’d say that the snowball method worked for me and my fiance. We were about 13k in debt and went with a credit consolidation service that we had no issues with. It sucked hard for a long time (the first year I was living on a waitress income). But we paid it all off in 2.5 years.
Low points: no internet (which was awful for me as a web developer), no cable, and no heat one winter. Driving a 1986 Honda Prelude instead of my 1998 fully loaded Accord, etc.
Eventually my income went up and every chance we got we paid extra on the big balances. The hardest part was knowing that our monthly payment to the credit consolidation people was $20 less than our *rent*.. but totally worth it.
And starting in December I get to do it all over again with student loans. Yay..
I’ve got a line of credit that’s currently got all of by debt resting on it (~10K).
It’s set up to take auto payments that taking interest into account will pay itself off in 3 years.
Plus I do micro payments when there’s spare cash around (although probably not as much as I should)
That being said, I have two credit cards that I use on a regular basis, and always pay down to zero as soon as I get home from spending on them. They both offer %2-3 cash back. So in January all of the money that I get from my cash back is going to my line of credit.
Kinda like a stick it to the man with their own credit money.
I can even pay my rent with a credit card, so there’s gonna be some nice cash back.
As much as everyone has been praising the “ladder” method (highest interest first)and “snowball” method(or as I originally heard it 10 years ago, the “reverse ladder” method), absolutely nothing beats adding more cash coming in. Sure, there drastic measures you can take to increase your cash flow, but when it’s all said and done, there are only so many things you can sell and there are only so many hours in the week for your second job (hey, you have to sleep sometime).
I have always been an advocate of finding small ways to increase your income, as well as been a champion of efficiency (life hacker, anyone?). So, why not combine the two things? My wife and I recently purchased our first home. It’s a Craftsman style, built in 1948, and needs a lot of work. In the process of fixing the old place up, I pulled LOTS of old galvanized steel and copper pipe out of the crawlspace, 2 old window a/c units, an old huge antenna and a few cast iron sinks. combined with the aluminum and tin cans we set aside for recycling, we made $80 in a month, without really doing anything different from what we had planned. I’m just waiting to see how much it will cost us to re-side the house when I deduct the cash from all of the aluminum siding that I’ll take to the recycling center.
It’s simple… green begets $green$
Everyday I look at the money I spent on on things that weren’t a necessity, like a latte, a book, a cd, etc. I take 10% of what I paid and transfer it into my savings account. At the end of the month, I take what’s accumulated in the savings account and put it toward my debt, basically making an extra payment every month. This way, I am less apt to buy things I don’t need, because I am essentially taxing myself 10%… while at the same time paying down debt a little quicker.
I recommend keeping track of everything. I wrote my own custom Perl program to do this easily, and even put it online so you can do it too:
http://theholtsite.com/cgi-bin/drbuck/drbuck.pl
That’s a simple version of a program like Quicken or whatever. You can’t always cut down on food and stuff, but it really helps to see “where it all goes” and the results after a couple of years may surprise you.
My wife and I make under $40k a year combined. We own a house, two cars we paid cash for, and the only debt we’re in is for our mortgage. Our current system is:
Base income -> taxes -> give 15% -> save 15% -> pay bills -> fun money (split 1/2 for each person) Some months we don’t get any extra money, some we get hundreds!
I do NOT recommend just taking another job to pay off debt. Not only will you get more stressed by working too much, that doesn’t help the problem. The problem is probably that you’re overspending what money you DO have, and working more isn’t going to help that much.
Is it bad, that I’m jealous of many of you?? LOL. We don’t have much credit card debt, but I’d love to be able to pay off my car. ($9K left) I’ve been paying ahead, but we don’t make NEARLY as much as some other people on here, probably $35-$40K a year. OUCH.
Someone spot me a ten?
I was doing fine until I had a dental emergency and THEN my student loans for the summer session were fooled around with. So yeah, what little emergency money I had went to travelling home to get my dental work done and I had to finance the remainder after I maxed out my dental benefits for the year. Then my loans were not approved in the manner I anticipated so I had to live on credit cards for a couple months (not a strategy I recommend to anyone).
Still haven’t gotten out of the debt hole, and since my raise got effectively eaten up by the increase in food and other necessities, I haven’t been able to contribute more to the payments. However, I have put myself on a cash allowance. 80 dollars a week, it works for me as a good magic number, sometimes I go down as low as 60. If I want to spend it all on groceries, that’s my choice. If I want to go out and skimp on groceries, also my choice. It does seem to be working. With luck, I should be able to get my finances all straightened out by the end of the year.
It’s entirely school debt that’s killing me now, and for the rest of my life. I do have a credit card balance, but that mostly came from a really desperate year of un- and under-employment (got to buy groceries somehow, and that emergency $1500 ER bill sucked, too). I’ve got a plan for paying off the card and as it’s a USAA Mastercard, the interest rate and terms are excellent.
But my student loans… the interest rate on my private ones just went up 3% without notice when the economy started tanking, from 5% to 8% even though I always pay on time. (And they will not negotiate with me in any way shape or form. When I asked if I would at least get notice of rate changes in the future the “connection dropped.” Mmm-hmm.) I am currently paying $170 monthly on one loan and $550 on another, to increase (for the final time in my graduated plan) to $275 and $550 in February. That’s equal to my rent and utilities, and I live in a not-cheap part of Arlington, VA.
Student loans SUCK. And there’s not a thing I can do about them. But I’m still better off with the degree than without… just thanks to the economy, that nice new salary doesn’t buy me jack shit.
The impending re-set of the credit system makes me wish I had more debt than I do (says the woman who’s only got about two grand, never more)
Unless you rob a bank, paying with cash only will not allow you to live above your means. Therefore, you will leave the credit card debt to those that don’t understand financial personal responsibility.
In 2007,a new guy bought the condo next door. He put in new hardwood floors. New drapes. New granite counter tops. Bought a new flat screen TV. Remodeled the fireplace. He tricked the place out. He spent $45,000.00 on all this great stuff. One problem: he put the entire $45k on the old credit card. Later, I found out he had over $80,000.00 in total credit card debt. He had a zero down payment, interest only mortgage loan. He was out of control, living way above his means. The man made $105,000.00 per year. He DIDN’T lose his job. One year later, a foreclosure notice was stuck on his front door. He is gone. Pure genius.
Wow, this article actually made me feel better about my two sources of debt- student loans (good debt, if there is such a thing), and an interest-free loan from my in-laws to buy our house. We’re actually focusing on the in-laws though, because they’re family and we want them to be able to put their money back where THEY can collect interest on it, and just paying the min on my student loans- which is still $500/month.