Debt Solutions

It is a sad fact that many people are in debt.  During the 4th quarter of 2005, almost 14 percent of American's disposable personal income was consumed by debt payments of all kinds, up from 12.77 percent five years earlier.  Although this number represents all debt (including mortgages and student loans), it still shows that we are a nation of debt.  How can you become debt free and begin investing all that money you spend every month in payments?  Let's look at a proven technique you can use get out of debt. 

Sit down and calculate how much debt you are really in.  You might be surprised to see the actual numbers.  Begin by writing down each account, balance owed, monthly payment, the interest rate you are paying and the term the loan is for (if applicable).  This is a good starting point to help you get a true picture of your entire debt.  Include all debts, even your mortgage. 

With the numbers clearly laid out, begin to organize your debts from highest interest rate to lowest.  In most cases things such as credit cards, personal loans and auto loans will be on top of this list, with student loans and mortgages coming nearer the bottom.  In most cases, it makes sense to keep paying the minimum amount due on your mortgage and any student loans, focusing on your other debt first. 

An example of this may be: 

Visa Balance: $2,500.00 Min. Payment Due: $50.00 Interest Rate: 19%

MasterCard Balance: $3,600 Min. Payment Due: $75.00 Interest Rate 17%

Car Loan Balance: $8,400 Min. Payment Due: $289.00 Interest Rate 5.89% Number of Payments Left 29

Mortgage Balance $189,000 Min. Payment Due: $1400.00 Interest Rate 5.05% Number of Payments Left 336

Looking at the above example, begin by putting any extra money per month toward the debt with the highest interest rate.  Suppose you could afford to pay $200.00 extra each month.  You would then send $250.00 each month to Visa, $75.00 per month to MasterCard and $289.00 each month to your car loan.  Within approximately 10-11 months, the Visa bill will be paid off.  

At this point you will begin to apply the $250.00 you were sending to Visa toward your MasterCard along with the $75.00 payments.  Your new monthly payments will be $325.00 to MasterCard and $289.00 to your car loan.  Continue to do this until your MasterCard is paid off, in this case it would be about 10 more months.   

At that point take the $375.00 and add it to your car payment, resulting in a new payment of $664.00 to send each month to your car loan until this is paid off.  You should have all your bills paid off in about 24 months.   

At this point you can choose to send that $664.00 each month to your mortgage as a principle payment to pay off your home quicker, invest the money, or simply save it for a rainy day.  The choice is up to you, but you will be free of credit card debt. 

As you can see focusing your extra payments on your highest interest debt first saves you money.  The key is that every time you pay off a debt, you apply the monthly payment from that debt to your next debt in line.  Each time the amount you send will increase resulting in a quicker payoff.  This method can be applied to most any situation and will result in less interest paid and quicker repayment.