Pay Off Debts To Manage Money Better
by Ricardo H Geltt on 2007-09-22
Offloading debts is a crucial part of managing your money. Freeing yourself from debt means more availability of funds for extra expenses and savings, which translates into more money in your bank. But the problem is that this seems pretty unmanageable especially when you are trying to work your way out of a number of loans at the same time. In this kind of a situation, the best way out is to be enterprising and pay off the debt by using an extra payment from one of your loans every month and work them off one by one. Though it seems difficult and requires planning, it is the quickest way to get out of a loan trap.
Now, there are two rules to follow when you apply this technique of money management. The first is to pay all your minimum balances without fail and second is to curtail spending, especially by credit cards. If you follow these two tips you can be sure everything else will fall in place as you work your way out of debt.
The first thing to do is put all of your loans in an order. You will pay them off in the order that they appear on your list. There are two types of lists, but you must pick the type that best fits you. Only choose one way. The first way is to order them from lowest balance to highest balance. The loan with the lowest money balance is placed first on this list (and hence the first loan you will pay off). On the second list, you list the debt in order of highest interest rate to lowest interest rate. The balance is not taken into consideration for this list; just the interest rate.
After deciding on the repayment priority with the help of the list you choose to follow, determine how much extra money, on top of all your minimum balances, can you divert towards loan payments each month. You take this extra amount of money and put it toward the first loan on your list. This means that if your minimum requirement for repayment on that loan is $50, and you have determined that you can pay an extra $25 each month, you will pay a total of $75 toward the first loan on your list. And for the remaining loans keep paying the minimum balance that you are required to pay each month.
When you pay off the first loan, move on to the second loan on the list. But this time put all of the money you put toward the paid off loan toward the second loan. So if you have a $10 minimum on the second, you add the whole $35 from the first loan for $45. You can see how as you pay off loans it goes faster and faster. But you never increase the amount of money you pay each month. Unless, of course, you can afford to up the extra amount you pay.
Now, there are two rules to follow when you apply this technique of money management. The first is to pay all your minimum balances without fail and second is to curtail spending, especially by credit cards. If you follow these two tips you can be sure everything else will fall in place as you work your way out of debt.
The first thing to do is put all of your loans in an order. You will pay them off in the order that they appear on your list. There are two types of lists, but you must pick the type that best fits you. Only choose one way. The first way is to order them from lowest balance to highest balance. The loan with the lowest money balance is placed first on this list (and hence the first loan you will pay off). On the second list, you list the debt in order of highest interest rate to lowest interest rate. The balance is not taken into consideration for this list; just the interest rate.
After deciding on the repayment priority with the help of the list you choose to follow, determine how much extra money, on top of all your minimum balances, can you divert towards loan payments each month. You take this extra amount of money and put it toward the first loan on your list. This means that if your minimum requirement for repayment on that loan is $50, and you have determined that you can pay an extra $25 each month, you will pay a total of $75 toward the first loan on your list. And for the remaining loans keep paying the minimum balance that you are required to pay each month.
When you pay off the first loan, move on to the second loan on the list. But this time put all of the money you put toward the paid off loan toward the second loan. So if you have a $10 minimum on the second, you add the whole $35 from the first loan for $45. You can see how as you pay off loans it goes faster and faster. But you never increase the amount of money you pay each month. Unless, of course, you can afford to up the extra amount you pay.
About The Author: Ricardo H Geltt is the Editor of Few Money. The #1 web source for information about money. For comments and more information visit: www.fewmoney.com Get your own completely unique content version of this article.