As I have mentioned before, I am a big fan of making multiple debt reduction payments, throughout the month, as a way to speed up the debt reduction progress. Before discussing the why of multiple payments, let’s discuss the how.
How To Make Multiple Monthly Debt Reduction Payments
1. Make minimum monthly payments to all creditors. This can be the actual minimums, as billed by your creditors, or higher, self-imposed minimums, as determined by your debt reduction plan.
2. As you earn, save, and receive extra income, throughout the month, make extra payments to the first creditor listed in your debt reduction plan. Use free online bill pay to send extra payments, adding apply to principal to the memo section of each check written.
Why Make Multiple Monthly Debt Reduction Payments
Obviously, instead of making multiple payments throughout the month, you could save up any extra in a savings account, and send that money to your creditors the following month. In fact, that’s what a lot of people do. I, on the other hand, really believe in the power of making multiple monthly payments, and here’s why.
Keeps My Head In The Game –
If I am sending multiple payments, say an extra payment each week, I am actively involved in the day-to-day management of my finances. Every transaction – every purchase, every expense -becomes an opportunity to save money. Knowing that any money saved has a purpose, and that it will, almost immediately, reduce my debt, really helps to keep me focused. Remember, personal finance is as much mental as it is mathematical.
Reduces My Average Daily Balance –
For the math nerds in the audience, making multiple monthly debt reduction payments makes mathematical sense. Why? As payments are credited to your account, your average daily balance decreases. A lower average daily balance leads to lower finance charges. Lower finance charges lead to more rapid debt reduction. Click here to view and download a free spreadsheet for calculating the impact of payment-timing and average daily balance. The only way that you lose the mathematical advantage is if you are earning more in your savings account than you are paying in interest on your debt.
Provides A Much Needed Emotional Boost –
Let’s face it, debt reduction can be a long, arduous process. For me, I needed the psychological rush that came from longing into my credit card account, and noting that my balance had decreased. Even if you can only spare a few dollars, it always feels good to be rid of debt. As crazy as it sounds, I once sent $5 a day to a credit card company, for a solid month, just to see if the process would work. I don’t recommend this particular strategy to anyone, but I do think that it is wise to send two or three extra payments each month. Like stepping on the scale and seeing another pound lost, we need these emotional boosts, throughout the month, to keep us going.
Gives Purpose To Any Unexpected Income –
It is very easy to squander unexpected income. I can remember receiving gifts or bonuses in the past, and instead of using them wisely for long-term stability, I would waste them on frivolous purchases. If you are making multiple monthly debt reduction payments, you know exactly what to do with any extra or unexpected income. You make an extra debt reduction payment. This simple, direct approach radically changed how I dealt with poor spending habits. Staying engaged, involved, and on plan, I stopped wasting money, and I started managing it.
Concept Works Even After All Debt Has Been Eliminated –
I am now debt free, and yet I still make multiple monthly payments – only now I make them to myself – in the form of contributions to my savings, retirement, and education savings accounts. Throughout the month, as I earn, save, or receive additional income, I am making transfers from my checking to my savings account. This constantly-engaged-mindset really works well for me.
What about you? Have you or are you making multiple debt reduction payments? Leave a comment and let us know how multiple monthly payments are working for you. Or, if you have any questions, feel free to ask.
For those who follow Dave Ramsey’s Debt Snowball, you might want to check out Paid Twice’s awesome series on SnowFlaking – her take on making multiple monthly payments.