Six Steps to Eliminating Your Debt Painlessly

by Nora Dunn

Eliminating Debt Painlessly. Rarely do you see these words fit together in a neat little sentence. The very act of putting your hard earned money towards the stack of debts you've accrued is painful. The good news is you can snowball your progress against mounting debts if you do it the right way.

Let's say you are juggling a number of debts, from student loans to credit cards to that loan your parents don't expect to ever see repaid but won't let you forget about either.

1. First things first: Write down each debt vehicle you have, the amount of the debt, and the rate of interest being charged. Department store cards are inevitably the worst culprits, charging interest rates that border on criminal. Next in line are usually the credit cards, student loans, then lines of credit, and your parents (unfortunately) usually come last.

EXAMPLE:

Balance Owing Interest

Sears $500 28%

Visa $2,000 18%

MC $1,000 16%

Student Loan $6,000 10%

Line of Credit $5,000 8%

Mum & Dad $1,500 0%

2. Next: Determine how much money you have available each month to put towards all your debts. If you're like most people on a tight budget you probably haphazardly throw the minimum payment plus a bit at each debt every month, hoping that eventually it will all magically disappear. Unfortunately, making minimum payments on most credit cards is a sentence to upwards of 15 years of paying off that debt, and paying at least double the original balance in interest only.

EXAMPLE:

Balance Owing Interest Min Pymt

Sears $500 28% $16

Visa $2,000 18% $66

MC $1,000 16% $25

Student Loan $6,000 10% $150

Line of Credit $5,000 8% $90

Mum & Dad $1,500 0% $0

TOTAL: $16,000 $347

Total amount you can put towards your debt each month: $450

3. Choose the highest interest debt on your list. (I don't care if it's the highest or lowest balance, just look at the interest rate). With the money you have designated towards all your debts, make ONLY minimum payments on all your debts, except your chosen highest interest debt, to which you put all the rest of your monthly allocation. Hopefully this is fair bit more than the minimum payment.

EXAMPLE:

Pay your extra $103/month to your Sears card in addition to the minimum payment, totalling $119/month.

4. Continue until your first debt is paid off. Now, you have one less debt to juggle each month. Yay! It may have taken a while to get here, but now you can cut up one card. No really. Cut it up. (Especially if it's a department store card. They're pure evil). The reason you got in this place to begin with is that you had too many cards, so let's reduce the number you have.

EXAMPLE:

Sears is paid off in 5 months. Card is destroyed.

5. Choose the next highest interest debt on your list. Repeat the same process as in steps three and four. You'll notice now, though, that you have more money to contribute towards your next debt of choice, since you now have one less debt payment nagging at your pocketbook.

EXAMPLE:

Visa is next. Now have an extra $119/month since the Sears card is paid off, in addition to the minimum Visa payment. Your total Visa payments are now $185.

6. And so on. Each time you systematically pay off one of your debts, you'll have more and more money to pay off the next debt on your list, effectively snowballing the process of paying off your debts. It picks up momentum quickly, and by the end you're blasting through your debts and even your parents get paid.

EXAMPLE:

After the Visa is paid off, you have $210/month for your Mastercard.

After the Mastercard is paid off, you have $360 for your Student Loan.

After the Student Loan is paid off, you have the full $450 for your Line of Credit.

After that, pay off your parents! It will only take you three months, and will get you in their good books for sure.

The total amount of time required to pay off this laundry list of debts: Under 5 years.

This is a long time, but think of it this way: Now you're Debt Free! You didn't have to toil every month over how much extra cash you can throw at the never-ending debt load, and you minimized every single dollar of interest you possibly could.

The trick is, you need to continue to allocate the same amount of money (or more) towards your overall debt every month until all your debts are paid off. If after tackling one or two cards you decide you can decrease your monthly allocation towards your debts, you'll only prolong the process and end up paying a ton of interest. A little bit of short term pain makes for lots of long term gain. You deserve it!

CAVEAT: There are other debt elimination plans that would have you pay off the lowest balance first, instead of the highest interest debt. The reason for this is the feeling of satisfaction you get from knocking off a debt from the pile, even though you may be doling out more interest dollars on a higher balance elsewhere.

The wrong person without enough dedication to the plan outlined in this article might give up if the first few debts were slow to be paid off (for example, if your Sears card had the $6,000 balance, it would take you over 3 years just to pay off your first debt. That's a long time to wait for tangible progress, even if it is the most efficient).

So take a look at your debts and ask yourself if you have the discipline to stick to the high interest plan. If not, try paying off a few smaller debts to get your legs under you and then re-evaluate. It's a personal choice - not all money matters are pure dollars and cents (I mean - sense).

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