Pay it Back Strategically
Michael Knowles
When you're paying back debts, a little strategy can make a difference of hundreds or even thousands of dollars. The best strategy is simple, but effective.
Create An Emergency Fund
You should have an emergency fund set up before you start to tackle that mountain of debt. You need at least 3 months of living expenses in the bank. Now this might be hard to do and it may take a little bit of work, but it will be very beneficial to you in the long run. For example what if you were to just jump in and pay a big bill and then next week you needed cash for a car repair of medical emergency? Sure you could charge it but that would just negate what you are trying to do. So do yourself a favor and get your emergency fund set up and then start paying your debts.
List Your Debts
Write down a list of every debt you have, how much it is, and what the interest rate is. You might have trouble finding this information, but it's worth getting it all together in one place and write it down. You can't manage your situation strategically if you don't even know it, can you? Remember to include your credit cards (with the different rates and balances for purchases and cash advances), other cards, loans, mortgages, and even money you've borrowed from friends and family. Every bit of debt counts, and you're trying to get it down to absolute zero.
Bad Debts and Good Debts
Go through your debts and mark them 'good' or 'bad'. You might think this is odd, but some kinds of debt are nowhere near as bad as others. A mortgage, for example, is an investment in a house, paid over a fixed term – there's no real risk of paying a ridiculous amount of interest or never getting it paid off, like you could with a credit card. Good debts: mortgages, student loans, car loans. Bad debts: credit cards, store cards.
As a rule, good debts are for a fixed amount of time and allow you to buy something valuable that you cannot afford, while bad debts are 'revolving' and are just used instead of cash.
Time to Prioritize
Cross your good debts off your list, for now – you shouldn't think about paying them off more quickly until you've got all your bad debts out of the way.
Now, arrange your debts in order of interest rate, with the highest interest rate at the top. The chances are that the debt at the top will be a store card or credit card, which could have a really huge interest rate. Try to transfer as much money as you can from the high-interest cards down the list to the lower-interest ones.
Once you've done that, focus all your energy on repaying the new top debt. Pay the minimum on everything else, and throw as much money as you can find at the problem. If you have any non-essential monthly commitments, consider cancelling them for a while, and putting that money towards your payments. Try keeping track of where your money goes, just for a month – you might find that you're spending loads on something you don't even want or need.
Do your best to give up any expensive habits you might have. You'll be shocked how fast your debts can go down if you put the money you'd usually spent on smoking, drinking or gambling towards them! I'm not trying to spoil your fun here. You're just making some small sacrifices for a while, and your life will be so much better for it in the long run. You have to be aggressive against that top debt, and determined to defeat it. This is a war, you're on the attack, and you want to win against your debt. Don't you?
Copyright 2005 Michael Knowles
www.freedomisyoursonline.com
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