Debt Payment Plan – 5 Steps To Take Today

by Neal Frankle, CFP ®

If you are in debt, your number one financial mission in life is to get rid of it as fast as possible.  Think of your debt as a big pile of salt at a salt mine. The cranes keep adding salt to the top of the heap growing the salt pile higher and higher – that’s the interest your credit card companies charge which grows your debt. The payments you make are the trucks that haul the salt away.

You want your payments (the trucks) to haul off that credit card debt (salt) faster than the interest grows your debt so eventually, nothing’s left.

Here’s how you do it:

1. List your debt

Do this on a spreadsheet or piece of paper. List the amount you owe, the interest rate you are being charged and who you owe the money to. Order the list in such a way the loans that are charging the highest interest rate are at the top of the list and the loans that charge the least are at the bottom. (The loans with the highest interest rate are those like the fastest cranes bringing salt to the pile. They are the ones that add to your debt fastest so you need to put those out of action quickly.)

2. Look for Options

With this list in hand, understand that you are looking for a credit card alternative. You want to replace high-cost debt with low cost debt – this is the first step to slow the growth of your debt pile.

The most obvious options include:

  • Calling up these companies and negotiating a lower rate.
  • Transferring the debt of one high-cost credit card to a lower cost credit card.
  • Refinancing with alternatives. This includes going to family and friends and asking them to loan you money at (let’s say) 6% so you can pay off your credit cards at 19%. Do this if and only if you actually can repay them and if you can show them your plan to do so.There are actually 5 other unique ways to lower your borrowing costs.
  • Another option, growing in popularity is peer to peer lending. Read my review of this service for more information.

3. Reorder the List100k

Reorder the list again listing the highest-cost loans at the top and the least-cost loans at the bottom. Now you have your debt targets spelled out for you.

4. Full Speed Ahead

Again, think of those debts at the top of the list as the fastest cranes adding salt to the top of your pile. You need to put those cranes out of action as quickly as possibly and deal with the other cranes later. Right? So your goal is to get rid of the highest-cost debt first. You do this by making minimum payments on all the other debts and applying everything else towards the high-cost debt. When you’ve retired the highest-cost debt, you make the minimum payments on all the other debts except the next-highest cost debt. You throw everything you can towards that one next. You don’t reduce the total amount you apply towards debt as you pay each down one by one. You throw a constant amount of money at a smaller and smaller amount of debt. This way, it all gets taken out very quickly.

5. Safeguards.

The last step is to make sure you never ever get into debt again no matter what. The way to do that is to implement a budget tracking system like you need a budget. This step will help you see what you are spending (and more important) help you make sure you don’t overspend.

Are there other important steps to a solid debt retirement plan?

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{ 1 comment… read it below or add one }

Julie October 16, 2011 at 7:23 PM

This is a great strategy! So many people take the money they are going to use to pay of debt and spread it evenly over all their debtors. The emotional problem with this is that you never see a dent being made in any of them. In addition to what you’ve set out as being a smart money strategy it is also a smart emotional strategy. Thanks for sharing!

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