How to get out of DEBT fast!

With the Holiday season behind us, I’m still carrying around a few extra lbs from overindulging these past few weeks (I think it was mainly the beer). However, something that I will not carry with me into the new year is DEBT.

WHY?

Mainly because I spend within my means, I track my budget regularly and I think about if I NEED it or if I WANT it prior to purchasing.

I routinely utilize both the 24hr and 7 day rule. While shopping (mainly online), if I find something that I want to purchase. I will place it in my cart and wait 24hrs to make sure I need it versus just wanting it. For larger purchases (TVs- which I still don't have, laptops, phones, trips etc), I will wait a full week before purchasing. I have made some poor financial decisions when I've been hungry, angry, lonely, tired, stressed or in pain. So these rules provide some protection against myself.

However, some of us may have overspent, considering it may have been the first time you’ve had your ‘typical’ family/friend function after a few years and we wanted to showcase our gift-giving skills.

If you’re in the camp of “Damn, I don’t want to see my credit card statement in Jan” then listen up (well don’t actually listen, but read below) 💸

The concept of getting out of debt is simple, but it isn’t easy to execute. Find out how using these three techniques help you pay off and eliminate your debt:

👉 Snowball Method: pay off your debt with the smallest minimum payment then move on to the next

👉 Avalanche Method: pay off the debt with the highest interest rate first and work your way down through the next balance owing

👉 Debt Consolidation: use lower interest rate debt to pay off higher interest rate debt (i.e use your 4% Line of Credit to pay off your 20% credit card)

Pick a technique that works best for your lifestyle. The hardest part is just getting started.

Let’s dig a bit deeper into each one using the following example

SNOWBALL METHOD

This method focuses on paying off the smallest debt first. 

The goal is to reduce the number of creditors and to provide the debt payer with a sense of accomplishment that will help keep them motivated. 

Like a snowball, the effects of each payment are minor at first, but as they pay off debt and eliminate creditors, they can then allocate the savings to the next smallest debt, which compounds the impact. 

Using this method, they would make all minimum payments and then pay down the Line of Credit (LoC). 

After the second month, the LoC would be eliminated, and the minimum payment of $10 could be added to the $435, increasing the remaining amount paid towards debt each month to $445. 

They would then work on paying down Credit Card 1.

AVALANCHE METHOD

This method aims to reduce the amount of interest paid and therefore increase the amount of debt payment that goes toward the principal. 

With this method, they would make all minimum payments and allocate the remaining $435 towards Credit Card 2, as this debt carries the highest interest rate.

Once Credit Card 2 is paid off, they would take the $435 and the $75 saved from the card's minimum payment and allocate this to Credit Card 1. 

You can see that this method incorporates the snowball method but differs in which debt to repay first.

DEBT CONSOLIDATION

Debt consolidation can be a great tool for individuals with multiple creditors that are serious about repaying debt. 

With the above example, there is $7,000 available on the LoC, at a rate lower than both credit cards and the Personal Loan. 

Under the debt consolidation strategy, they would borrow $5,500 from the LoC to pay off both credit cards. 

They could take this one step further and make a one-time pre-payment to the personal loan of $1,500, thus maxing out the LoC, and increasing the minimum payment from $10 to $75. The savings from the credit card minimum payments ($35 + $75 = $110) would more than cover the increased LoC payment and the difference can be used to continue paying down the Personal Loan. 

Once the Personal Loan is paid off, they would start paying off the LoC (next-highest interest rate).

CAVEATS

Tax-deductible debt: If the interest on the debt is tax-deductible, the after-tax cost of the debt may not actually be that high.

Student debt: Some student debt comes with an interest-free grace period of six months where no interest is charged on the loan.

Medical training debt: In the terms of the contract, it may state that the debt does not need to be repaid right away or in some cases, at all. An example of this could be an interest-free grace period or what is known in the medical field as a 'return of service' arrangement.

If you're interested in learning more about getting your financial house in order and how to set up your financial life, please register for the recorded beginner course.