How We Became Debt Free: From $40K in Past Due Debt to Over $30K Extra Cash In The Bank (Part 3 of 3)Step 3: Redirect the money previously spent on housing toward paying off ALL your debt. If you have been paying off debt you’ve accumulated over the years slowly, or you have only been getting deeper and deeper into debt every month, you can now see light at the end of the tunnel—and this time it isn’t a train heading for you.

By simply using the income that was once allocated to paying your rent or mortgage and redirecting it toward your unsecured debt (credit cards, car loans, student loans, home equity loans, etc.), you will decimate debt at twice the speed. That includes your small business debt. Work to pay any outstanding debt attached to your name.

How do you do it? There are basically two ways…

Tackle the highest interest first then move to the second highest interest

or

Tackle the lowest balance first then move to the second lowest balance
(the snowball method)

Choose one method and go with it.

Highest interest: If you have four outstanding credit balances, here is how attacking them would look from each method.

A: Visa 1: $400 @ 22% APR

B: Master Card: $200 @ 18% APR

C: Discover: $650 @ 0% APR

D: American Express: $3,000 @ 9% APR

Highest Interest First Method:

  • Pay as much as you can on A (22% APR) first while making minimum monthly payments on B, C and D.
  • When A is paid off completely, use the money you were paying on A to pay off B (18% APR) – while paying minimum monthly payments on C and D.
  • Next tackle D (9% APR) then minimum on C until D is Paid in Full.
  • Pay off C.
  • Debt Free!

Lowest Balance First – Snowball Method:

  • Pay as much as you can on B ($200) first while making minimum monthly payments on A, C and D.
  • When B is paid off completely, use the money you were paying on B to pay off A ($400) while paying minimum monthly payments on C and D.
  • Next tackle C ($650) then minimum on D until C is Paid in Full.
  • Pay off D.
  • Debt Free!

Either way, choose a method and move forward. We personally used the Snowball Method. It gave us easier goals where we could build momentum from conquering the small debts first.

If you are having a difficult time making payments, get credit or debt counseling from a reputable non-profit agency. Be sure to check them out thoroughly. If you do decide to go with a debt consolidation service, be sure that they check out. Fiona and I were naive and lucky. We chose Federated Financial without checking them out. We paid off every creditor and collector and even received a $500 check at the end for completing the program successfully. They froze all interests down to zero interest (except Ford Motor Credit) which made it much easier for us to pay off everyone.

No longer did we have to talk to creditors or collectors, our agent did all of that for us.

Note: I have hear horror stories about friends who have gone to a debt consolidation company and were taken for thousands of dollars. One friend was making payments monthly on schedule and the consolidation company was banking that money and disappeared with $6,000 of her payments. The credit companies never received a dime. She has since filed for bankruptcy.

What about personal debt – debt between you and a friend or family member needs to be paid off too. If you borrowed $100 from your friend that you haven’t talked to in 9 years, be sure to pay them back as well. You may not choose to pay them off first, but don’t forget them. Call it karma or closing a loop or reinstating a friendship that ended because of money. You said you would pay them back, live up to your word. You will be more of a whole person for doing so.

You will feel so good about yourself after paying off everyone that you will feel like you are flying. I remember when we were paying off everyone on schedule. I felt more respect for myself. I knew I’d get there.

Like a diet, I didn’t want to cheat and sneak in a 99 cent cheeseburger or a $2 coffee that wasn’t in the budget. I knew I could wait until I got home or to work to eat. I felt so good about the track I was on, I wasn’t tempted by the guitar for half of retail cost or the newer motorcycle helmet. The chance are that what you want to replace is and will still be good for a while longer. The problem is that we get impatient and want the new thing that you read about or saw while watching the Superbowl.

Get it in your head that you are on a fiscal diet. How little can you get by on without friends and relatives attempting to have you committed?

Okay, that may be a bit far, but get in the habit of not spending. Write up a list of what to buy with a budget. Stay within that budget and go shopping for necessities once or twice a week. I know many people who shop every day for a little thing here and there. They go in to pick up toilet paper and come out with a couple bags of stuff that was on sale or they passed by that reminded them of something that they needed.

Those little purchases ad up over the month to hundreds of dollars.

After everyone is paid in full, it’s time to start investing.

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