Here’s a quick tip that will help you get out of debt or increase your savings without worrying if you will have enough money to last until your next paycheck.
Instead of sending ALL of your extra debt payment at one time, send multiple debt payments throughout the month.
I used this technique when I was getting out of debt, and I had great success with it. Let me show you an example.
Suppose you have the following monthly minimum debt payments:
Automobile Payment: 500
Credit Card Payment: 100
Personal Loan Payment: 200
Every month, you are already committed to paying a minimum of 800 dollars towards your debt. Now, let’s assume that you have decided that you can afford to send 200 dollars extra towards your credit card payment. You have a choice to make. Will you send a single 300 dollar payment to your credit card company, or will you send a 100 dollar payment to cover the minimum, and then send a 200 dollar payment (later in the month) as your extra payment?
Most people who decide to get out of debt will send the single 300 dollar payment, and if that works for you, awesome! But, others will send the minimum payment, and promise themselves that they will “save” 200 dollars during the month, and send it in later. Inevitably, “life happens” and you fail to save the 200 dollars, so you do not make any extra progress towards debt reduction.
I came up with a “compromise” solution. If you are worried that you cannot “afford” to send the entire 200 at one time, but you know that you have a history of not “saving” the extra 200 dollars, try the following. Send MULTIPLE, smaller, extra payments. Instead of sending 200 dollars at the first of the month, send 50 dollars per week for an entire month. Or, send 25 dollars every 3 or 4 days.
You can use online bill pay to send multiple monthly payments. (Do NOT use this method if you are sending stamped mail, for obvious reasons.) One of the added benefits of this technique? If something comes “up” during the month, you can suspend your extra payments for a week or two, and then restart them once you’re past the temporary setback. Another benefit? You get to see some progress, almost every week, and it will keep you motivated. Plus, and this was something pretty awesome that I found happening over and over as I moved toward debt freedom, you will find yourself sending in MORE money every month than you first anticipated.
Think of it like this: If you budget 200 extra, and you send in 200 extra, then you will more than likely SPEND any additional money that might be freed up during the month. But, if you are sending in multiple smaller amounts, you will be more likely to apply and additional money towards extra debt repayment. Your 200 might become 225, or 250, or even 300.
Try it out, and let me know how it works for you. (I went really crazy at one point, and I was sending Citibank 5 dollars a DAY! I forced myself to find someway to make 5 “extra” dollars a day so that I could send in extra debt payments.)
One last thing: You can actually combine the full extra payment and the smaller extra payments. In the example above, you could send in the full 300 at the first of the month, and then send in smaller amounts during the month as additional money is earned or freed up. I used this combo technique when I was saving up my emergency fund.
(I’d send in my budgeted amount at the first of the month, and then send in smaller amounts throughout the rest of the month. Many people do this with SAVINGS accounts, but you can also do this with CREDIT accounts.)
Also, by driving down the average daily balance through the billing period, you are lowering the finance charge for that month too!
If you are transferring money from a savings account, be aware of monthly transaction limits – exceed them and you may incur costly fees. Along the same lines, some credit cards limit the number of payments you can make per month or impose other restrictions on payments. Also, and this is more of an issue for cars and mortgages and the like, make sure there are no pre-payment penalties on your loan before you use this method.
All that said, this is a great technique – one that I have used to save both time and a lot of money in interest.
I’ve done this sort of thing with amazing effects. Each time I’ve done it, I’ve targeted a bill I’d been steadily snowballing down, but really attacked it with a vengence to the exclusion of other things, because I’d “find” money in places. Most recently I started doing this right before Thanksgiving with a CC and managed to pay off $3,800 between Thanksgiving and February 1 — notably that was over the spendy holidays too!
After this I’ve decided it’s simply the way to go — so I have two more credit cards where I’m going to first pay the minimums, and then just pour every additional available dollar during the month towards one of the cards til its gone. Then I’m going to do a savings blitzkrieg to build my full emergency fund, take a little vacation for being a good girl, and finally commence on the oh-so-scary student loan blitzkreig.
(P.S. — I’m doing this while contributing 15% monthly to retirement/savings accounts already.
P.P.S. — I’m also laying claim to the phrase “debt blitzkrieg”! It’s a gmv original. 🙂
also be conscious of when the billing cycle is, b/c if you end up short because your automatic payments don’t fall correctly, you’ll be paying late fees.
Personally I’m fanatic about when the billing cycle is. I USED to always be right on the edge of being late, if not actually late. That was before I started down the path of debt snowballing and started using online bill pay.
Now I’ve worked myself to a point where I monitor the paycycle, and always make at least my minimum payment on the day the billing cycle rolls over and the new payment due is shown. Thanks to using my bank’s online bill pay, they always have their payment 2-3 days after the start of the billing cycle, and then I adjust the date of my next payment to coincide with the start of the next billing cycle.
The other thing this has taught me is discipline in other spending. When I started getting my finances in shape I’d rush to pay the bills right after receiving my latest paycheck, and since I get paid twice a month had my “first paycheck” and “last paycheck” expenses. Now, I don’t need to worry about it, because I have learned to let the balance sit there and wait for the start of the billing cycle. It makes me much more aware of the times payment are due, and helps me plan for the three auto-withdrawals I have each month (phone and Roth IRA).
The result is it’s the beginning of Feb. and I’m already done with Feb. bills — I’m already planning ahead to March’s billing cycle.
Note — this won’t work if you aren’t able or willing to monitor balances daily, but online banking makes that easy. Also, I have relatively few things I’m tracking — only a couple of credit cards and a student loan. I still just routinely pay my heat and cable bills the Monday after every first paycheck of the month and that works fine.
This is my plan for paying down debt, but I also noticed that CitiBank only allows 4 ‘click to pay’ on-line payments a month. Seems like Citi has caught on to this plan and doesn’t want us to pay down debt.
Sam.
NEVER USE THE CREDIT CARDS CLICK TO PAY SERVICE. THIS GIVES THEM ACCESS TO YOUR CHECKING ACCOUNT! CLICK TO PAY IS NOT THE SAME THING AS SENDING IN MULTIPLE PAYMENTS FROM YOUR BANK!!!
What’s the problem with click to pay and giving the Credit card company access to my checking account?
Beth, Do you REALLY trust the Credit Card companies with your checking account? No way. What’s to keep them from making unauthorized withdrawals? No WAY would I use this service, not in a million, billion years!!!
I did this for a while, except that I was paying $200 twice a month. The minimum payment was $250, so of course, they only accepted one of the payments as a payment for the month, thus I was $50 under the minimum payment. They rate jacked me on this, I called, they didnt budge, so i did another BT to another 0% card.
keep an eye on that APR when repaying the debt.
Using online banking, I automated $250 transfers to my line of credit on both paydays in the month, therefore, eliminating the urge to spend that money. It’s gone before you get a chance to spend it. AND, my line of credit disappared in 5 months. Now, I’ve added that $500 a month payment straight to my mortgage to pay that down. Maybe not quite as fast but it should be gone in a few years. It’s like an extra payment a month for me.
I *twice* made the mistake of linking my checking account to a bill account – my rent and my gas bill. *Both* overcharged and double billed me two months apart, and getting them to get the money back *before* the end of the month was next to impossible – they said I should just carry the positive balance for a month (which meant using credit cards for *everything* that month, no thank you!)
After a lot of hassle, I got the money back in about a week, after complaining the the Public Utilities Commission and BBB. *That* is why you don’t give anyone access to your checking account.
Woah, this is genius. I can’t wait to start making micropayments! Thanks for the tip!
Great Advice! Yeah, your finance charges will go down because they can’t charge you interest if you’ve paid them.
There is a way out of this debt ridden life. My vision — Debt Free…
Peace
DT
http://www.debtingthomas.com
Whenever I get ANY non-work check coming my way (reimbursement, tax refund, rebate, birthday money, etc.), I immediately turn around and make a credit card payment for that exact amount so that I don’t have the urge to go and spend it. Works well with the multiple monthly payments plan.
Great advice! I also put any bonuses or extra checks to debt or savings (which has been emptied 🙁 )
I didn’t notice any comments about Prosper.com. This is an absolutely fabulous way to reduce your payments. Due to free market setting the rate, almost all borrowers can get lower rates. For strategies, and signup, drop in! Dan
I have used this method and its great! Why did I never think of it? Making multiple payments really speeded up my process!
I did something somewhat similar. Whenever I saved some money on a sale or using a coupon or got some surprise money (finding a dollar bill in a drawer), I immediately sent it via my checking account on line bill pay towards our charge card even if it was only $2.00
My bank and charge card do not charge transaction fees for even tiny amounts and at the end of the month I was pleasantly surprised how much $2.00 here, $3.00 there etc added up in a not felt principle pay down.
Another way to “find” extra money for accelerated debt payments is to transfer anything left in your checking account from your previous paycheck when your next paycheck is deposited. Is that about as clear as mud?
I used to live paycheck-to-paycheck, but now, having eliminated my debt using this method, there is always money in my account.
Problem is, my credit union, which owns my only debt, will not accept a payment toward principal online. If you do an EFT to transfer funds from a checking account to the debt, it’s applied toward interest. If the interest is more than the amount you transfer, then the entire amount gets gobbled up by interest. The only way you can get around that is to make your transfer on the day the regular payment is due, within minutes after your EFT for the regular payment posts.
Who has time to fiddle with that?
I have to physically carry a payment to a credit union and instruct the teller–sometimes quite firmly–to apply it to principal. Fortunately, the CU has a branch on the campus where I work, where, by dint of throwing quite a sh**-fit, I’ve trained the staff to accept extra payments toward principal. If I try it at another branch, the teller will announce it’s against the institution’s rules to accept extra principal payments, and that some or all of the payment must be engrossed to pay interest.
You’ve convinced me, BTW, that the idea of accruing extra pay-down money in savings and then using it to pay down principal once every three to six months is not great. Since the Great Desert University has canceled my insurance plan and will force me into one that costs ten times (! literally!!) what I’ve been paying, there won’t be any money left for debt snowflakes, blitzkriegs, or whatever. I’m going to take the cash I have saved and pay down the loan this week. That will reduce the interest in the regular payments so that at least each regular payment pulls down principal by about $140 a month. Better than nothing, eh?
This is a great way of paying off your debt. I to was once way in debt and thanks to the internet and some lucky fortune I was able to pay mine off. I would pay off debt as soon as I had extra money.
When you do this you are less likely to not spend it on something you dont need. Instead your making one more step to being debt free. And trust me being debt free is the best thing in the world.
I used to put half of my paychecks immediately onto my credit card tab, and then use my credit card as needed throughout the month. Basically the idea is to never spend cash while putting as much cash as you can towards your credit card debt up front each month. If you’re credit card co has some good management software, this is an efficient way to cut your cc debt back quickly. Make sure to pay off everything that doesn’t allow credit as payment before you dump the remaining paycheck onto your credit card bill though.