STEP 5 – ATTACK YOUR DEBT
It’s time to kick your debt to the curb. I give my clients three options to eliminate their debts.
The first option is the debt snowball. With this method, you list all of your debts (excluding your mortgage) from smallest balance to the highest. You pay the minimum on all of the debts except the smallest balance. You scrounge up all the leftover cash in your spending plan and apply it to this debt. Once it is paid off, you take all of the money you were applying to it and move to the next highest debt. As you continue to pay off debt, the amount you are paying on the focused debt increases, thus the “snowball” effect.
The second option is the highest interest rate. With this method, you list all of your debts (excluding your mortgage) from highest interest rate to the lowest. Just like the debt snowball, you pay the minimum on all of the debts except the highest interest rate. You scrounge up all of the leftover cash in your spending plan and apply it to this debt. When that one is paid off, you move to the next highest interest rate. Rinse and repeat.
Caution: If you cannot pay off your highest interest rate debt within 6-12 months, I would explore using a different method. I say this because you may become frustrated that you are not paying things off in a timely manner.
The third option is by emotional factor. Do you have a debt that is just weighing you down emotionally? For my wife and me, it was a family loan. Although it was “no interest” we wanted it gone immediately. Therefore, we decided to pay it off first even though it would have been further down the page if we would have went with any of the previous methods.
With this method, I want you to list all of your debts by emotional factor. Find the ones that eat at you the most and put them at the top. If you are indifferent on some of the remaining debts, list them in order based on one of the other two methods above. Once you have your list, work it just as you did the other methods. Pay the minimum on everything except the top debt. Attack the top debt with all of the remaining funds you have available. Rinse and repeat.
Choose one of the previous plans to start today!