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I run across many people on a regular basis and when they ask what it is I do, I tell them I am a financial planner and love assisting Main Street families in getting out of debt. Two things typically happen. One is they immediately inform me at how bad their math is or two, they wish they could pay off their debt.
Good News: You don't have to be a mathematical genius to pay off your debt. I wasn't either but math is practice and my passion in helping families outweighed my algebra skills. Also, debt can be paid off quickly if you are educated with the right tools and will to learn.
Bad News: The Center for Microeconomic Data, or CMD for short, released a report a few months ago called "Household Debt and Credit. It revealed that household debt has "reached a new peak in the fourth quarter of 2017, rising $193 billion to reach $13.15 trillion."1 Yikes! This tells me we have to control our spending and pay off our debt.
How Fast Have You Paid Off Debt?
Tell us below in the comments section.
When banks loan you money, you may pay an interest rate of anywhere from 4-6% depending on your credit score, bank, and other outside factors. If you have a credit card with that bank, the interest rate on that is most likely anywhere ranging from 7-18% annually. If you purchased a Certificate of Deposit (CD) or have a checking account with this bank, odds are they are paying ONLY you 2% or less. So where is this difference in money going? Easy answer...to the bank. It's profit.
Strategy: A strategy that I have learned from financial guru, planners, advisors, alike [people better at math than me] is to use a tool that the financial industry utilizes. This strategy develops a process that analyzes interest rates, how fast debt can be paid, timing of payment, etc. It is called the Debt Stacking Model and here is how it works:
Research You Debts: You will have to pull out your debt statements and take out a piece of paper. Starting writing down the debt balance, interest rate, and date payment is due.
List Debt from Small to Large Balances: This topic is usually the most debatable. While some will focus to pay off debt with the highest interest rate--you can do that as long as your commitment level remains. Most are psychologically burned out and when they feel their debt is declining, they resort back to old habits. When they start to see balances getting paid off, it re-energizes and motivates them to continue. So yes it is a psychology process.
Make payments: Seems ordinary and simple. But here is the catch. Pay the recommended minimum balances on time; yet, the lowest amount of debt (should be at the top of your list) pay more on this debt.
"Once the first debt is paid off, take the same amount of payment...
use it to pay off the second debt."
Payment Stacking: Once the first debt is paid off, take the same amount of payment from the debt paid off, and use it to pay off the second debt. This will speed up the payment process and your debt payments should be consistent on a monthly basis. See the example "DEBT STACKING PAYMENT PLAN". Continue this process until your debt is paid.
Some debts will be paid off faster than others but you will be amazed at how fast some of these debts get paid and are forever out of your life.
If you are in a particular stressed out position where you are still having difficulty getting ahead or perhaps considering just to consolidate some debt so you can breathe, then I recommend using a very reputable company that I have used in the past to consolidate some bills. This financial company is SoFi and conducts quite a bit of business online and the application process was super easy and fast.
They offer a variety of loans from Student Loan Refinancing to Mortgage Loans and now they offer Wealth Management options for investors. I've used them in the because they provided me better interest rates than any competitor.
Another strategy is to search for loans that offers lower interest rates than what you're currently paying. If you are currently paying on a credit card with an APR of 23% then it only makes sense to apply for a loan where the APR is 9%. But MOST IMPORTANTLY, you will have to lock away your credit card once you pay it off. In other words, avoid using it.
This effective strategy will not only reduce your payments, but will improve your credit score because the revolving debt from the credit is wiped away but you will see improvements in your monthly budget with free capital. One way to search for such rates is Lending Tree to shop around for interest rates.
The important factors of getting out of debt quickly is to have a solid plan in place and to stay consistent. Consistency will be developed by your motivation and determination to get it paid off quickly. Stick to the plan or give it a try and drop us a comment below to know how the plan worked for you so that you can be an inspiration to others.
If you are looking for ways to fix a failing Budget, then Nick's friend Mindy at TheFrugalMama.org provides other great tips on budgeting and ways to save money!