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- Debt & Bankruptcy
How to Save your Money: Organizing Your Debt
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How To Organize Debt To Pay It Off Faster
Whether it is a car loan, mortgage, credit card debt, student loans, business or personal loans, most of us have some debt we are paying off. Many people simply pay the minimum payments and think nothing more about it. Others have extra money to put towards debt after their minimum payments are made, but are unsure how much or towards what debt to put their extra money towards to pay off their debt faster and more efficiently.
Below are two step by step ways to organize your debt and pay off your debt faster. I will use an example to emphasize the process.
- Car loan- $5,000. Monthly minimum payment of $200 interest rate is 5%
- Student loans- $15,000. Monthly minimum payment of $300 interest rate is 7%
- Credit card- $1,000. Monthly minimum payment of $50 interest rate of 15%
- Wal-Mart Visa- $1,500. Monthly minimum payment of $25. Interest rate 18%
For this example, we are automatically going to pay the minimum payments on everything, which totals $575, we have $700 to go towards our debt, so there is an extra $125 to allocate towards our outstanding debt.
The first method is the financial method. This, by the numbers is the best way to organize and pay off your debt
1. Organize your debt by interest rate, highest to lowest:
a. Wal-Mart Visa, credit card, student loans, car loans.
2. Make the minimum payments on all debt
3. Put all extra money towards the highest interest rate, your goal is to pay that off first, which is the Wal-Mart Visa
4. Once that is paid off, take ALL of the funds from the previous payments towards the next highest interest rate, this would be the credit card in our example.
The math behind this is that you want to eliminate the highest interest rates first. Because each month that goes by, it is the highest interest rates that collect the most interest to first be paid off before you can pay down the principal. By doing this, you are making the most of your time, and minimizing the harsh effects of the interest rates.
The next method I call the emotional method. Let’s face it, money is emotional. In fact, let’s be honest, very few things are more emotional than money. And that poses a conflict. Because although most of the time there are mathematically correct ways to handle your finances, emotion will time and time again beat out logical thought. Below is a way to embrace this emotion, yet still effectively organize your debt and pay it down efficiently.
1. Organize your debt in order from smallest to largest
a. Credit card, Wal-Mart, Car loan, Student Loans
2. Make the minimum payments towards all debt, then put all extra money towards the smallest amount of debt, in the example, this is the credit card
3. Once it is paid off, take ALL extra funds and add them to the next smallest, in the example this would be the Wal-Mart Visa.
The thinking behind this is that of emotion. It is a great feeling to completely pay something off. This gives you confidence and a sense of accomplishment, it is a goal achieved. The theory is when you have a few of these goals met, you will be in for the long haul towards those bigger debts, because you have seen your organized system work.
Though this way is not as efficient, it is none the less effective. My recommendation is to try the first method, as you will get the most out of your money, but again, if you need to see success sooner than later, try method two.