1. An Accurate Current Status
To start off, you need to have an idea of what debts you have, their remaining balances, minimum payments, and their current interest rates. Create a list that contains this information, along with the company you owe the debt to. Once you have that completed, arrange the list in one of two ways.
One way you can arrange your list is by using the remaining balances. Start with the account that you have the highest amount left to pay and work your way down the list to the lowest remaining balance. Another method for creating your list is by using the same procedures but start your list with the account that has the highest interest rate. Continue with your list until you are sure you have not forgotten any debts.
To help you decide which method for creating your list is best for you, ask yourself two questions: Are the amounts of your remaining balances fairly high, and how many payments do you have left to pay? If you have a substantial amount of money left to repay, go with the interest rate method. By eliminating the debt with the highest interest rate, you will save money in the long run. However, if your remaining balances are low to moderate, go with the remaining balances method. Once you eliminate the largest debt you owe, you will have more funds to apply to the smaller debts.
2. Arrange Your Funds
With list in hand, set aside enough money to cover the minimum payments on each debt. With the funds you have remaining, apply an additional payment amount to the debt that is on the top of your list, in other words, make two payments. If the minimum payment is too steep and you do not have enough funds for making an additional payment, move down your list to debt that you can afford to make an additional payment on.
Yes, you could go ahead and apply your remaining funds to the remaining balance on the debt that you have on the top of your list, however, our goal is to pay off your debts, not pay them down. This will all become clearer a little later on.
3. Set’ em Up and Knock’ em Down
Once you have started this plan, keep going until you have the first debt completely paid off. When it is gone, you can take the money from that payment you no longer have and apply it to the next debt on your list. If you had to skip the top debt, go back and see if you now have enough to be able to make two payments. Continue paying off your debts in this manner until you have completely cleared your list. Before long, you will have accomplished what you initially thought would be impossible, you have eliminated your debts.
Does this plan sound familiar? It is commonly referred to as the “debt snowball”. No, I am not saying this little slice of genius is my creation. I am simply saying that it is the best way to eliminate your debts without causing, even more, financial hardships. Just keep in mind that if you are having a hard time making even the minimum payments, you will have to either find an extra source of income to initiate this plan, or look for financial counseling to help via alternative methods.