Step 5 Pay Down Debt


	Learn to Pay Down Debt Fast! The pay down debt step is my favorite. In this step you get to work. I'll show you tips and tricks you'll wonder how you survived without. The bank is keeping your money, and I'll prove it. You can't pay down debt, if the bank has all your money. Please understand that this information is available at no cost to you because I want to help you get out of debt. I'll cover debt reduction software, snowballing payments, merged money accounts, interest, and I'll even give you some free debt calculators! Let's get one thing straight right up front. I believe we got ourselves into this debt mess, and we must get ourselves out. Repeat after me... it's no body's fault but my own. Only I can fix it. OK great. You are on your way. I'm not here to help you with a debt settlement, or negotiate debt. Those ways of solving debt problems only hurt your credit rating. I'm going to show you how to pay off your debt, in the best manner, so you can improve your credit score, but better yet, if you follow my debt management plan through, you'll never need your credit score again! That's because you'll be the one with the money, not the banks! Do you have too much debt to pay? Visit my creative ideas page to learn tips and tricks to pay down debt that you've probably never thought of. Join our Free Debt Forum and get a free EBook! Before we can pay down debt, we need money. Let's start by looking at our family budgets. Do you have yours handy? Hopefully by this point in the program you have been following your budget for at least a month, and tracking your expenses. This will help you right now. We need to find out first, if you have any "extra" income left over at the end of the month that you can use to pay down debt. This extra is what accelerates your debt payoff. If you don't, don't worry, I'll show you some tricks in a few minutes. This extra is sometimes called an accelerator margin, or the start of the snowball. Make sure you always pay at least the minimum due on every bill every month. otherwise you won't be helping your credit score. If you have more payments than you have income, you are in a pickle. You need to get a 2nd job, a paper route, or cut some expenses to get it to balance out. In order to pay down debt, you have to make at least the minimum payment on every bill. In this first example, we're going to go with an extra payment, if you don't have any extra, you'll still want to read this because I'm going to get you some extra shortly. When you pay down debt, where do you apply your extra to give you the most bang for your buck? That's a great question. Let's take an example to help illustrate this. Our example family has the following bills: Mortgage of $1250/mo at 6.25% interest (balance 125,000) for 23 years Car payment of $450/mo at 7.5% interest (balance 5,000) for 1.5 years Credit card of $75/mo at 18% interest (balance 11,000) for 10 years Credit card balance transfer of $35/mo at 4% interest (balance 3,000) for 5 years. And we have that $100/mo "extra" spoken of in an earlier example. Usually the most bang for your buck to save you money is to pay the highest interest loan first. So we'd pay all the bills minimum payment only, except the credit card at 18% interest, we'd tack the extra $100 to the $75 so we'll pay that credit card monthly $175. Please note, that the minimum payment will start to drop rapidly, always continue to pay the $175/mo until it's paid in full. There is, of course, some exceptions to the pay the highest interest rate first. That is, if a balance on a loan is such that with the extra it will be paid off at least a year before any other loan, you want to pay that first, or if your mortgage still has more than 15 years, pay it off last. In our example above, the card payment is already $450/mo if we add the $100 to that, and make a $550/mo payment we will pay off the car in less than a year. So in this case we actually want to pay the car off first, not only will it pay it off much sooner than any other loan, it just happens to have a very high payment, that will allow us to snowball and pay down debt faster. We'll get into snowballing payments next. You know on those great cartoons, when a character starts a small snowball down the hill, and it slowly picks up speed until it's as big as a house rolling down the hill? It's the same principle here. We pick a loan to pay off, and when that loan is paid off, we take the money we were paying toward that debt, and any extra we have and apply it to the next loan. Even if the first bill is $10/mo, paying it off gives us that much more to pay to the next debt. That may seem like a small change, but just like in the snowball example, it will grow fast. This is because you stop paying interest on that money, and every month your principle is getting smaller and smaller. Therefore, more and more of your payment is going to principle, and it repeats. To make sure everyone understands this principle, Let's go back to the example above. This family was paying $450/mo and $100 in extra. Let's assume now they didn't have any extra to pay down debt with. They would simply keep paying the car loan as before, but when the loan is paid off, instead of using that money elsewhere, or going to buy a new car, they use that $450 as their extra. We now add that $450/mo to the $75/mo of the high interest credit card. We are now paying $525/mo to the credit card payment (if you have extra add it here also) As you can see we're now paying 7 times the payment we were making, so we're going to pay off this bill in 1/7th the amount of time. That 10 years is going to disappear into about 2! Then we'll keep the snowball going right into the next loan, and the next, by the time we get to the last loan, we'll be paying $1810/mo toward the mortgage in just a couple of years! Once we start doing that, the mortgage is going to shrivel up and die in only a few years. Can you imagine? Instead of 23 years to paying off the house, maybe 10? Does this get you excited to pay down your debt. Imagine what you could do with $1810/mo going into your savings account, instead of towards debt. Now, I'm sure some of you have heard that the interest on a mortgage is tax deductable, and is the biggest tax deduction we get, and that you don't want to get rid of your mortgage because you need that tax deduction. Consider this... If you pay $10,000 in interest on a mortgage, and get to deduct that from your taxes, you'll decrease the actual amount of money you pay to the government, by maybe, I'm way over estimating here, maybe $3000 and probably only $1000 (of course all this depends on your tax situation, dependants, other deductions, etc). But in no case would you ever get more back from the government than you paid to interest. So would you rather pay the government $3000, or a mortgage company $10,000? Seems to me like a $7000 difference would be obvious. Join our Free Debt Forum and get a free EBook! Some will tell you the time value of money isn't quite that straight forward. And they are right, there are many other variables that go into it. There are calculators, I'll put one on here, or a link to one, that calculate whether paying off your mortgage, or saving the money is the better option. Obviously the purpose of this site is to teach you to pay down debt, so that's what I suggest. But I submit to you, that if you are in debt beyond what you want, you probably have some self discipline issues, so putting that money into a savings account for the rest of your life, probably won't happen. Whatever route you decide is best for you, do it, and set it up in your bill pay service and forgetting about it, like auto-pilot. In order to pay down debt, you must stick to your plan. Move on to step 6 Save & Invest Return from Pay Down Debt to Debt Management Plan Home

Learn to Pay Down Debt Fast!