What’s the best method for paying down your debt? My leaning is to pay off the highest interest rate debt first.
You will need your list of all outstanding debt, monthly payments, and interest rates. Rank this list by interest rate with the highest rate loan first, then in descending order. You will probably find that you have several credit cards with interest rates of 18% to 21% or more. To me it makes the most sense to pay off the debt with the highest interest rate first because it is costing you the most every month.
For example – You may have cards with 18% monthly interest and a car loan that you negotiated a low rate of 4% or even 0% interest. One credit card with a balance of $5000 and 18% interest will cost you about $900 the next year in interest alone. By paying off the car loan, you save nothing in interest expense next year. But by paying down the credit card, you will save 18% on the extra amount used to pay down that debt.
So, step number one, is to rank your debt. Then find money in your budget by earning more or decreasing expenses such as dining out or lattes or whatever you are willing to forego. Use these funds to pay down the highest interest rate debt first. Continue to pay on all your other debts as usual.
Let’s say that you have come up with $200 per month that you can use to pay down your debt. The first loan that you will pay down is a credit card with a $1400 balance. If you have been paying $35 per month towards this bill, add $200 per month (total of $235) and you will have the bill paid in full in about 6 months!
After the first card is paid off, add $235 to the payment for the card with the next highest interest rate. If you were paying $75 per month to this next debt, add $235 to $75 and begin making payments of $310.
Continue this process. Over time you will increase the amount used to pay off debt by adding the amount from each paid off loan to come up with a new amount to be used to pay off the next.
But remember: NO NEW DEBT! The objective is to PAY OFF all debt. Yes, you CAN keep up this process until you pay off even your home mortgage, if you have one.
Objective: Get out of DEBT! Why? Out of control debt can strain your relationship by adding unnecessary stress to your marriage. You won’t be fighting over the bills because you don’t have any bills for debt.
No debt. Try it. You’ll like it. And so will your spouse!