Getting out of debt. It can seem like an impossible task but it really isn’t once you break it down and make a plan. There are many different ideas of what plan should be used to get out of debt. I think each individual financial situation is different and each plan will be different. However, this plan is a great starting point or guide for you to devise your plan form. For this example we’ll have 4 debts.
Car loan $8,000 Min pay $200
Visa $3,000 $150
Discover $1,000 $100
JC Penny $150
Step 1: List all your debts and list them in order of smallest balance to largest.
In many cases this will be the order in which you pay off your debts. If your smallest debt is just a few hundred dollars you will most likely be able to pay this debt off quickly once you stop all unnecessary spending and take all available cash on to this debt. So in this example this person might be able to go ahead and pay the $150 JC Penny bill and have it paid off.
Step 2: Start paying off your debts smallest to largest.
Each month take all the money you can scrape up (after your necessary expenses: food, housing, utilities) and pay minimums on all your debts except for the lowest. On that debt pay as much as you can. Continue doing this until the lowest debt is paid off.
Now with JC Penny gone this persons lowest debt is Discover. He will pay the minimum on the other two and put as much as he can on the Discover. Let’s say he can pay the minimum plus an extra $200. That’s $300 a month. That means in 4 months he’ll have it paid off.
Step 3: Move to the next debt.
Now take everything you were paying on the debt you just paid off and put it on the next debt.
Take the $300 he was paying on the Discover and add it to the minimum of $150 he’s paying on the Visa. Now he’s paying $450 a month on the Visa which means he should have the Visa paid off in about 6 months.
After that he will take the $450 and add it to what he’s paying on the car loan.
Well, you get the point. Take these steps and you will be out of debt much sooner than you might think.