Debt Reduction

Sure-fire Debt Reduction Process

I like to keep things simple. Here’s a super-simple, step-by-step process for getting out of debt. (Most people who find my blog are looking for advice about getting out of debt. There are tons of books, conferences, and radio programs which deal with the subject. But, I have found that the following few steps are all that you really need. Ready? Let’s go!)

Assumption 1: You are NOT behind with any of your debt payments. If you are, get current as soon as you can, pay minimums on all of your accounts, etc. The following process is for those of you who are current with all of your accounts, and are ready to accelerate your debt reduction.

Assumption 2: You have a small cash-reserve as an emergency fund. I suggest a minimum of 500 dollars, and a maximum of 2000 dollars. Any amount smaller than 500 will not be adequate for any “real” emergency, and any more than 2000 will prevent you from using available money for debt reduction. In other words, have enough cash for a small emergency, but use any amount above your emergency fund for debt reduction.

Assumption 3: You have stopped borrowing money and / or using credit cards.

Step 1: List your debts by balance, lowest balance to highest balance. (Include all debts that you wish to payoff. This can include or exclude your mortgage.)

Step 2: Pay your monthly minimums for all of your accounts. (This will be your monthly payment for any auto, student, or installment loans, plus your minimum payment for any credit card loan. Always pay your minimums.)

Step 3: In a savings or checking account, save as much money as you can, above and beyond your other monthly expenses, for debt reduction. At the end of the month, put this amount of money towards your LOWEST BALANCE.

Repeat. That’s it. Each month, list your balances, lowest to highest, pay your minimums, and put as much as you can towards the lowest balance. Once you pay a loan off, you will have that much more money to put towards your next debt. (This is also known as the debt snow-ball).

(Alternative method: List your debts highest INTEREST to lowest INTEREST, and pay the higher interest loan off first. This will get you out of debt “faster”, but you will not receive the psychological boost of paying off those little debts.)

For those interested in super-charging their debt reduction the follwing:

Advanced Step 1: Temporarily reduce all non-matching retirement contributions.
Advanced Step 2: Temporarily get another job / create more income.
Advanced Step 3: Getting a big tax refund? STOP! Go to your job, and adjust your W-4 so that you have more take-home pay. You do NOT need to give the government an interest-free loan every year.
Advanced Step 4: Sell some stuff, get rid of that leased car, go eBay crazy.
Advanced Step 5: See all of those personal finance links on the right-hand side of this page? Check them out and educate yourself!!! Knowledge is power!!!

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2 thoughts on “Sure-fire Debt Reduction Process

  1. Highest interest rate to lowest rate saves more money in the long run. Lowest to highest debt gives the illusion of faster progress which has its psychological advantages but will cost you more in interest payments over time.

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