Total Debt Elimination3-Step Total Debt Elimination PlanMany how-to-get-out-of-debt plans fail because they are over complicated and not practical. This plan, however, is simple. It has just three steps. Follow them and soon you'll eventually become debt free. Step OneThe first step in learning how to handle debt is to concentrate on the financial facts. Determine how much money is actually owed, the total monthly payments, and the interest costs. Write down the amounts and total them.Many people with serious debt problems have no idea how much interest they are paying each month. Though this may seem surprising, it's part of our human nature to avoid painful truth. Subconsciously, we really don't want to know how much we owe. And considering the interest paid sometimes, it's altogether understandable. However, a good financial diagnosis is the first step back to a healthy financial life and must be part of any serious plan for total debt elimination. For example, if you have a monthly "net" income of $2000 and you are paying $200 in monthly interest charges, then you are paying out 10% of your monthly income for nothing. Granted, you might argue that it's not entirely for nothing; you are getting to enjoy the items you bought early; you did not have to save for weeks and perhaps months to buy them outright. However, is it really worth 10% of your income to get that big-screen television or a new wardrobe in advance? Do you really want to hand your hard-earned money over to the banks? Be brutally honest. Once that $200 in interest becomes the total amount you can pay each month, you have reached the point of no return -- you can never pay the debt off. If all your available cash is going to interest nothing is going towards the principle. True, this example may be extreme, but think about how much of your monthly payments go for interest compared to repayment of principle. Let's say you borrow $10,000 at 7% annual interest for 60 months (5 years) to purchase a used car, or to renovate your kitchen. You would repay $199.09 per month. Over 5 years, the interest would cost you $1,945.65 -- about 19.5% of the total loan. One ploy of lending companies is to suggest lengthening the term of the loan to make your payments more affordable. For example, by increasing the term of the above loan to 84 months (7 years), you would repay just $152.05 per month at 7%. However, the interest would now cost you $2,772.10 -- about 28% of the total loan! Altogether, you would pay out $12,772.10, 22% of which is interest. And during the first year, from 35% to 39% of the monthly repayment goes solely to interest.
No wonder the money lenders get rich. How much are you paying in interest each month? Once you have the facts for your situation, you need to take steps two and three of your total debt elimination plan. Step TwoBudgeting finances. It's time to get serious about personal budget planning. Develop a workable budget that will permit you to make bill payments as large as you can possibly handle. At this stage in your total debt elimination plan, it's important that the bills get paid off so you stop paying needless interest. Yes, it will be painful, but it's a step that's absolutely necessary if you hope to pay off the bills and restore financial health.More Information About Budgeting Finances Next, you could try the Debt Snowball method to reduce debt. This involves paying off the smallest bill first. Then, use that money to pay off the next smallest, and so on. Simply continue this practice until all the bills are paid. Or, you could do the reverse and pay off the largest bill first. You would save more in interest charges in the long run this way. However, most people find the reverse Debt Snowball effect harder to stick to as progress appears to be slower. How To Use The Debt Snowball Method Step ThreeThe third step in your total debt elimination plan is the most difficult yet most important step, and it needs to be implemented simultaneously with the first step: You must stop borrowing. Do not allow yourself to incur any more debt until you have paid down your original debt to a reasonable level.What is a reasonable level of debt? For some who constantly struggle, it means you should avoid committing more than 5% to 10% of your net monthly income to cover monthly bill payments. Then again, the maximum might be 15% to 20% for those with a good income, strong willpower, and the ability to follow a strict budget. But for addicted credit card junkies, the level is zero: cut up those cards. Facing financial reality head-on and committing to proper spending habits are the two most difficult things for anyone with a bad financial history to do. However, they are absolutely necessary if you desire credit restoration and true financial independence. Stick to your 3-step total debt elimination plan and become debt free! TOP of Total Debt Elimination RETURN to Eliminate Credit Card Debts HOME to Get The Best Credit Cards
|
