Do you truly want to be debt free? In my opinion, this is the most difficult step in the 7 step plan (as outlined in a previous article). Not including a home mortgage, some debt-loads can easily total upwards of $50,000 with just student loans and car loans alone. And how much disposable income (total money left after all expenses) do these individuals have? Typically, less than $200 extra a month. When we step back and look at the numbers, we could easily be in debt our whole lives!!
When my wife and I started our journey together, we both brought some debt with us. We didn’t think much of it until the bills started coming in! One of the loans was approximately $6,500. That doesn’t seem like that big of a number right? Well when I looked closely at the numbers, they had the payments stretched out over 10 years! And, if we would have paid those minimum payments, our total amount paid would have been nearly $9,000!! That didn’t sit too well with me. So here are some ways that I cancelled that debt in a hurry.
1. If you pay more than the minimum, the additional money goes towards the principal and you never get charged that interest!
– If Dar and I would have paid the minimum payments (I think they were $75 a month), approximately $40 of that payment actually went toward the principle (the full debt amount of $6,500). So then were does the rest go? The other $35 went to the interest payment of course. But, what if we paid $150 instead of $75? Well, originally, I figured that $80 would go to the principle and $70 would go to the interest (just double the previous figures because the payment was double the minimum). This is NOT TRUE!! If we paid $150, then the amount paid to interest was the same as if we would have paid the minimum – in our case, it was $35, leaving $115 to be taken off of the principle! With this simple idea, we now took an extra $35 off the principle than if we would have paid the minimum payment for 2 months. Yeah, once again, I realize that this isn’t super exciting, but it sure gets my juices flowing when I realize that I’m that much closer to being debt free!!
2. Start the “Debt Snowball” (as Dave Ramsey calls it)
– If you have more than a single loan, how do you decide which one to pay off first? According to Dave, in order to get the “snowball” rolling quickly, you should write your debts on a piece of paper; put them in ascending order with the smallest remaining balance first and the largest last. Take a look at the table below:
– The debts have already been put in order. You can see that the Gas Card has the highest interest and the lowest balance, so it goes first on the list. Let’s say you have a garage sale and you make $400, this amount goes straight to the Gas Card, and you pay off the balance. Now you have an extra $60 per month that you’re not paying on the gas card, so where does it go? It goes toward the MasterCard (credit card payment – I’m sure everyone can relate). So now instead of paying only $70, you are paying $130 ($70+$60), and the MasterCard will get paid off in almost half the time of the minimum payment route. Then, one that is paid off, you take your $130 extra and place that toward the Visa, and so on. It’s amazing how quickly you can pay off these debts when using the debt snowball method.
I realize that this was a bit detailed for many of you to handle, so perhaps you can look forward to my post tomorrow: Why would anyone want to be without debt? What benefit does this have? Stay tuned.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.