Here is a formula for quickly getting out of debt that I’ve seen from a couple of different sources. It takes a little discipline to follow to the end, but it’s well worthwhile. Just imagine not having to pay out all that interest every month! How much more could you afford to do if you didn’t have to pay interest any more?
Step One: STOP USING CREDIT TO MAKE PURCHASES!!
This is perhaps the most influential part of the process. If you can’t afford to live on what you earn, you’re spending too much! And the only thing you accomplish is to dig yourself into a hole that just gets deeper and deeper. If you want to get out of the hole, the first step is to stop digging.
Step Two: FIGURE OUT YOUR MONTHLY BUDGET
What you are working for at this step is to assign your monthly earnings to paying off your credit debts and a little more. The more you can add to the payoff payment, the quicker you can get out of debt completely.
Make sure your budget allows for your living expenses such as food, utilities, gas for your car, and between 5% and 10% of your monthly earnings for entertainment. Anything left over after these should be applied towards debt payoff.
What you want to do is arrange to have at least $150 per month that you can apply towards eliminating your debt beyond the minimum monthly payments. You may have to make some sacrifices to make it happen, but the freedom at the end of this will be phenomenal! Of course, the other way to make this happen is to start earning more money. Either way, find some extra money to pay off your debts with.
Step Three: PAY OFF THE SMALLEST DEBT FIRST
Start making minimum monthly payments to all credit accounts except one. On this one account, make the largest payment you can (minimum monthly plus the $150+ payoff amount). Continue this until this one account is paid off.
Here’s an example. Let’s say you have 2 credit cards to be paid off, a car payment, and a house payment. Start paying off one of the 2 credit cards first. By eliminating a smaller debt, you’ll soon have more money each month to apply toward the next larger debt.
To understand this further, let’s look at some numbers.
Total Minimums: $1400/month minimum
Extra Payoff $$: $150/month
From this, you can see that we’re going to be making $1550 per month payments until everything is paid off. The first credit card will get $250 a month payments until it is paid off.
Step Four: MOVE TO THE NEXT LARGER DEBT
Now that you have one debt paid off, start applying everything you were paying on the smaller debt toward the next larger one. Now you’re paying the minimum payment on this debt plus the total amount you were paying on the freshly eliminated debt.
For example, if you just paid off the first of 2 credit cards, you will now be making minimum payments on both the house and the car, with the rest of your monthly debt payments (equal to the amount you have already been paying) being applied towards the second credit card. In this example, the second credit card will receive the original $250/month payment plus the $250/month that we were paying on the first card, for a total of $500/month until it is paid off.
Step Five: REPEAT AND CONTINUE THROUGH ALL DEBTS
Once the second debt is paid off, just move on to the next larger debt and pay that one off. In the above example, the car debt will start to receive $750/month until it is paid off, after which the house debt will get $1550 a month until it’s paid off.
Most people can eliminate all of their debts in 5 to 7 years using this plan, and that includes their house! Imagine owning your house free and clear in 7 years or less!
Now that you have $1550 a month extra income that you weren’t using for living expenses, redirect that cash flow into investments that will grow and pay you a passive income. Do this first before you start spending it on luxuries and whatnot. A couple of years of this and you will have a huge investment portfolio that will give you a solid income that you won’t have to work for! How much fun will you have receiving an income while you get to go play?