RelayRides blogger and budgetary expert, Amanda L. Grossman, shares some simple tips for prioritizing and ridding your life of debt.
Since September 2010 when we declared ourselves consumer debt-free, we have said goodbye to approximately $75 in monthly interest payments. We also welcomed an increase to our monthly cash flow of $950. Being out of debt for the last 28 months has added an extra $2,100 in our pockets on interest payments alone. Needless to say, this changed the course of our financial and personal futures.
Have you decided that this is the year you want to make great strides in becoming debt-free? Let me show you ways to prioritize your debt, boost your income without a second job, and work your way out of debt as quickly as possible.
Gather All of Your Debt in One Location
Do you have an accurate picture of how much debt you are in? How about which creditors you owe, how much you owe them, and the interest rates?
Take the time to write down each creditor, the amount owed, and the interest rate on a sheet of paper, back of an envelope, or an excel sheet (if you are numbers geek like me). This may sound like a chore—and you might have to make a few phone calls or download get your free annual credit reports in order to verify the debts you have—but trust me, it’s a step you don’t want to skip.
Prioritize which Debt to Pay off First
There are various methods to use when paying off your debt. Some are psychological boosters to keep you motivated with quick wins, while others are more financially sound to ensure that you pay the least amount of interest as possible. What you need to do is to choose a method from the list below that best suits your needs.
Avalanche Method: Using this method, you would list your debts from highest interest rates to lowest, regardless of the amount of principal that is owed. The strength in this method is allowing you to get out of debt paying the least amount of interest as possible.
Snowball Method: Using this method, you would list your debts from lowest principal balance to the highest. The idea is that you get to pay off the first few debts more quickly than not, giving you some quick wins to keep you motivated.
Tsunami Method: Using this method, you would list your debts from highest emotional pain to lowest emotional pain. For example, if you owe your grandfather money and this has caused tension between the two of you, then you would likely get a great boost in motivation (and emotional ease) by paying this debt off first regardless of the principal amount or interest rate. Once you list the debts causing you emotional pain at the top, then you reprioritize the remaining debts according to highest interest rate to lowest.
Once you choose your plan of attack, relist your debts in the order of the payment method.
Pay the Minimum on All debts and Put Extra towards the Debt on the Top of Your List
Throughout your debt payoff process, you will need to pay the minimum amount due on each debt. Then, any extra money that you have (see below) you will send as additional payment on top of the minimum on your highest priority debt. As you pay off the debt on the top of your list, you then continue paying the minimums on all remaining debts, but throw any extra money you have in additional to the minimum payment on the second debt on your list. Rinse and repeat.
Boost Your Income without Getting a Second Job
Imagine how much more quickly you could become debt-free by employing your vehicle during times it would be sitting in your driveway collecting dust. Add extra cash to your debt payments by renting out your idle vehicle on a peer-to-peer car sharing marketplace such as RelayRides.com. The average renter makes an extra $250 per month using this website, which is basically cancelling out your monthly car payment. It’s a win-win situation!
Use the method above to prioritize your debts, boost your income, and end your debt cycle much sooner than you would by just blindly paying the minimum each month.