Debt Payments Category: Business Financing
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Other Ideas for Accelerating Debt Payments
Debt Roll-down - Part 3 of a 3 Part Series
In our discussion of how to get out of debt as quickly as possible, we started with the idea of creating a debt calendar. We make the minimum required payment to all of our creditors each month. Once one debt is paid off, we use the monthly amount we were sending to that creditor and add it to the payment we send to the next creditor on the list. We continue the process each time a new debt is paid off.
Before long, all of the debts are completely paid off. Next we discussed how using a mortgage can help us create a "margin" (additional money) each month in our budget which can be used to pay down debts even faster. This idea is especially helpful when debts can be consolidated into the mortgage, thus lowering interest rates on debt and giving you increased tax advantages. In this month's issue, we will discuss several other ideas for increasing this margin. The idea is that the bigger the margin you can create (and the more of that margin that you use to accelerate the payoff of your debts), the quicker you will be debt free.
Creating a margin is really just a combination of reducing expenses and/or increasing income. Here are some ideas to help you create the largest margin possible:
* There may be some money available in your current budget that you can dedicate to paying off your debts. Do it!
* If you are currently saving money each month (for retirement or other purposes), consider using this money - or part of it - to pay off your debts and then reinstate your savings program once the debts are gone. The reason for this is that if you are saving at 3% and paying interest on debts at 18%, you are losing a significant amount of money, especially over time. However, one caution is in order: We STRONGLY recommend having 3 to 6 months worth of expenses saved in an emergency fund. If you have your emergency fund in place already, use your monthly savings amount to increase your margin and accelerate debt payments. If not, you will need to decide what course of action to take. You may decide to continue your savings until you do have an adequate emergency fund. Or you may continue saving some of that money and using the rest to add to your margin for debt payments. The danger of not having an adequate emergency fund is that if "life happens", you will find yourself in a tight spot. It could be a medical bill, a car repair, an investment opportunity, etc. But if you don't have the money available in an emergency fund, it can be a source of much stress and anxiety. You may even have to pull out the credit card again to cover it, creating a vicious cycle you were trying to avoid in the first place - being in debt.
* Consider refinancing your auto loans. Rates are extremely low right now and this may save you some extra money as well. Credit unions usually have the best rates on auto loans, so if you belong to a credit union or you meet the eligibility requirement to belong to one, do it!
* Refinance your student loans. Interest rates on student loans have never been lower! Although this may not save you as much as some of the other suggestions, every little bit helps.
* Increase your income. There are many ways to do so. Start a small business on the side. Sell things on e-bay(r). Get a part-time job for a short amount of time until the debts are paid off. Even $100 or $200 a month extra will drastically accelerate your debt payments and get you out of debt quickly.
* Transfer credit card balances to credit cards with lower interest rates (consider some introductory offers, balance transfer offers, etc.)
* If you usually get a large tax refund every year, use your refund to pay down your debts. Also, if you receive W-2 income, consider increasing the number of withholding allowances you claim on your W-4 form with your employer. This way, you get more money in your paycheck which you can use immediately to pay down debt. Let's say that you get $1800 back at tax time. Paying $150 per month toward your debts will accelerate your debt payments much faster than waiting a whole year and then paying $1800 all at once.
* I have saved one of the best suggestions for last. Use a spending management plan. We recommend the MVelopes(r) spending management plan. This system allows you to easily monitor your spending and find ways you can save money. Mostly, this type of plan is to help keep you accountable for your spending habits. The results can be amazing. Many people who use this system have found an extra 10% in their budget. For someone making $3,000 a month, this would represent $300 a month savings. The best part is that this plan is very easy to use. To find out more about the MVelopes spending management plan, go to www.contractormd.com and click on the "Spending Management Plan" icon on the bottom right corner of the screen. You can try it absolutely free for 30 days. If you like it and wish to continue using it, the monthly charge is extremely minimal!
We hope that you will use some of these suggestions and get rid of BAD DEBT (debt that doesn't help you make money) as quickly as possible. There is no better feeling than being debt free! And getting rid of debt is the first step toward creating wealth. Good luck in your efforts to become debt free.
-by Dan Wattleworth
Director of Coaching
Financial M.D. & Associates
www.contractormd.com
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