Feeling overwhelmed by debt is one of the most stressful experiences. Often, it is so debilitating that the person in debt does not even know where to begin. If you are in that position, and if you have the resources to tackle the problem (that is, you have a source of income), then this article is for you.
The first step is to get organized. You must know the latest balances of each of your debts and what your total indebtedness is. While this step sounds like common sense, many people who are deep in debt are afraid to know the truth. Taking this first step, therefore, is a major component of dealing with this issue.
If you are computer literate, then organizing this information in a spreadsheet it the easiest approach. If not, tracking the information in a written ledger will work as well. The key is that after you have this information documented, you update it as you make payments. While you may feel like it is going to take you forever to make a dent in your balance, that is not the case at all. While your initial results may be relatively small, you will find that the rate of pay-down accelerates quickly as time goes on. This is because more of your payment will be applied to principal than to interest.
To further accelerate the process, I recommend using my “Round Number Pay-down Method”. This method is simple. To utilize this method, pay as much extra as you can such that the balance will be a round number. For example, if you have a credit card with a balance of $10,197.89, and the minimum amount due is $150.22, pay $197.89 in order to make your new balance $10,000 even. If you can, pay even more, but make sure the result will be an even dollar amount.
On the surface, this approach may not seem like a big deal, but it really is. It gets you in the habit of paying more than the minimum amount due. The more you pay this month, the less interest you will pay in the future. This can amount to hundreds or thousands of dollars in savings, depending on your total indebtedness. Paying the minimum will not only take what feels like forever to pay off your debts, but it will cause you to pay much more in interest. The other benefit of this approach is that there is something psychologically appealing to even dollar amounts. I don’t know if any research exists to prove this, but I believe it to be true.
If you are wondering which debts to tackle first, there are several approaches. One approach encourages people to pay off their smallest balances first. For example, if you have six credit cards, and the one with the lowest balance is $543.23, then you should focus most of your extra payment on this one card. The rationale of this approach is that paying off a debt is motivational and will encourage you to move on to the next one. The other approach is to focus on the ones with the highest interest rate. In doing so, this will provide you the most savings in terms of lowering the amount of interest you pay. This approach is superior for that reason. However, I encourage you to use the method that you will find the most motivating.
I hope that it goes without saying that if you are going to tackle your debt, it is imperative that you stop utilizing your credit cards. Cut up all but one to use in case of an absolute emergency. Also, I encourage you to negotiate a lower rate with your credit card companies. Many people are uncomfortable doing this, but believe me, it’s common practice and you should have a high success rate.
Good luck with tracking your balances and keeping the balance a round number by paying more than the minimum due. This is a simple approach that works, and you will soon be amazed at the results!