“How the F will I stop paying minimums?!?”
The idea is you decide to pay off small debts; one of your student loans for example, or one smaller-total credit card. You have a tool, and it’s the fact that once it’s paid you use that money to pay off the next debt.
It’s called the snowball effect, and it helps if you’re only paying minimums on everything. You pick ONE debt to pay more than minimums on. That payment will go directly to the principal, knocking it out faster, and thereby knocking out your overall debt. Once one is gone, you’ll home more money to put towards the next loan, etc.
Goal: Identify a smaller debt with a larger interest rate and pay the CRAP out of it.
Example: You have $366/mo debt payments
- $243 student loan 1, 120 months at 8% on $20,000 ends up being 31% interest
- $56 student loan 2, 120 months at 2% on $6000, ends up being 10% interest
- $23 credit card 1, total loan $1550, interest rate 12.5% …will last 10 years & 43% interest
– if you paid $138/mo will last 13 months & 6% interest. Finding an extra $115/mo for 12 months saves you $1072 in interest.
- $44 credit card 2, $2550 @ 16.5% over 10 years; 51% interest [a total of 2,671.65!]
– if you paid $142/mo over 1.5 years, you pay 12% interest, a total of $305. Finding an extra $98/mo for 18 months saves you $2300 extra interest.
Step 1: Identify which loan to go for first. In the example above, CC 1 is the smallest loan but CC 2 is the highest interest and relatively small, so start there. Your payoff goes farthest & you can do this with less money to start.
Your tool? Numbers you can get using math that a computer does for you: http://www.calculator.net/loan-calculator.html
Step 2: Identify where in your budget you can dedicate more money to debt. (Yeah, I know it sucks. But so does paying minimums on debt.) You can basically either spend less on other things, or make more money.
Think of it this way, spending more now means HAVING more later. In the budget above you find and extra $98/month.
Perhaps it’s a good time to up your client billing rate, ask for a raise, or cancel cable/hulu/netflix/appleTV, lower the gigs of gata on your phone plan, or decide to go on a spending hiatus.
Step 3. Revise your budget all around so you know you’re on point. Freaking put your weekly cash in an envelope, leave your cards at home, do what you gotta do so and get stoked that you are.
PAY THAT SHEET
Step 4. Put the payments you’re going to make in your paper/digital calendar, on your phone. Automate them if possible.
Step 4a. DO NOT FORGET TO PAY the extra. Reward yourself when you do!
RINSE AND REPEAT
Step 5. It’s 18 months from today. You saved $2300 and your monthly payments just went DOWN $142. Now, where will you repeat that process?
For example you could opt to only put the extra $115/mo on the other credit card and get your nails done nice with designs with the extra $27 every month after you pay off the next card.
That’s what I’d do, anyway.