Twenty dollars a month doesn't seem so bad, does it? That's how debt starts. Say that 10 more times though, and now you're looking at over $200 a month. That's how debt becomes a problem. Debt seems to be a way of life these days and many of us don't think twice about whipping out a credit card when we see something we want. Those charges add up though, and they come with some whopping interest rates too. Getting out of debt takes effort and discipline, particularly when you're on a tight budget, but it is definitely doable.
Collect all of your most recent account statements and personal notes for debts you owe.
Write down every debt you have, the total amount remaining due for each, and the minimum monthly payment for each. Don't forget personal debts to family and friends as well. You can create this list on a computer for ease of sorting and tracking or just use a regular pen and piece of paper. The important part is to make sure you've written down every single debt you have.
Reorganize your debt list from the smallest total balance to the largest.
Write down your total current monthly income. This includes take-home pay and anything else you may receive regularly such as royalties or settlements.
Write down a list of ongoing bills that must be paid each month such as the electric, rent and telephone. Include minimum debt payments on this list such as the minimum payment for your credit card and the amount of your monthly car payment.
Write the amount of each bill next to it in the list. If the bill fluctuates, write down a high average.
Add all of your everyday bills together, then subtract that total from your total monthly income. Extra income above and beyond your regular bills is a surplus that can be used to pay off debt.
Add the amount of your income surplus to the minimum payment of the first bill on your list, the one with the smallest total balance due. When you send the minimum payment for that debt and include the income surplus, you are paying extra on that debt and can have it crossed off your list much more quickly. If the income surplus is more than the total balance due for that debt, pay it off immediately and add any remaining surplus to the minimum payment of the next smallest debt.
Add the income surplus to the minimum payment from the first debt you paid off. This is your new surplus amount. Add this surplus to the minimum payment of your next smallest debt. Example: Your first debt was $20 borrowed from your dad. You budgeted a minimum payment of $5 per month. After paying this off, add that $5 you were paying to a new debt. Your second smallest debt is a total of $100 and the minimum payment is $10 per month. Add the original $5 minimum payment amount and pay back the $100 debt at $15 per month to "snowball" the payments faster.
Continue rolling all surplus and minimum payments from previous debt balances to the next one in your list until all debts are fully paid.
- Debts are generally credit accounts such as credit cards, student loans, personal loans and car loans. Ongoing bills such as the electric, telephone and car insurance are not considered debt unless they are delinquent.
- You need to stop racking up more debt immediately. If you use the system noted here to pay off a credit card bill and then turn around and go on a shopping spree with that credit card, you're just putting yourself right back at square one with additional debt to pay off. Cut up the credit cards so you're not tempted to use them again in the future.
Kathy Burns-Millyard has been a professional writer since 1997. Originally specializing in business, technology, environment and health topics, Burns now focuses on home, garden and hobby interest articles. Her garden work has appeared on GardenGuides.com and other publications. She enjoys practicing Permaculture in her home garden near Tucson, Ariz.