A 2-step Plan to Paying Off Debt

by : Dennis Harting



Millions of people are strapped financially because of massive debt. Revolving credit is reaching record levels. The majority of individuals with high credit card balances pay only the monthly minimum. Of course, we have all heard how long it takes to pay off the debt when remitting this amount. To compound the problem, the banks raise the limits once an individual shows consistency in making the payments. They make more money the further in the hole that someone gets. It is a endless cycle that one gets on with the only ending being bankruptcy.

No strategy for reducing or eliminating debt will occur without a change in spending habits. It should be obvious that the present spending pattern created this situation to begin with. Lack of discipline is often the root of most financial difficulties. Naturally, there is always the exceptions of layoff or divorce. It is necessary to get honest if the circumstances are to change.

It is easily apparent yet still needs to be stated: if the credit card company raises the limit, that is not a license to spend more. Many people feel that when the money is given to them, it is their obligation to spend it. No thought is given to how it will be repaid. From this point forward, nothing more is put onto the credit card. If you are in a hole, it is a good idea to stop digging.

Now we use the following two steps to get out of the hole. It might seem rather simple, yet that is what makes it effective. People tend to not do things that are overly complex. We are dealing with ingrain habits developed over decades. It is important to design a plan that is easy to follow.

Step 1: Find additional resources to apply to the debt

It is necessary to increase the our payments over the minimum. To do this, we must find additional money to add to that payment. This seems difficult for many since they believe that all their funds go to paying their bills. However, in most instances this is not true. When people write down exactly what they are spending money on, they quickly learn that hundreds of dollars a month is discretionary spending. For example, while it is necessary to eat, does one have to eat at a restaurant 5 days a week. Bringing a lunch will save between $4-$6 per meal. Also, many like to buy a coffee on their way to work. A savings of $30-$90 per month is realized by brewing it at home.

We found that most people regain a minimum of $200 a month by looking at their habits. Additional savings can be found by altering the heat or air conditioning by a few degrees. This will save $20-$30 a month. Calling the cable company and switching to the basic package saves another $40-$60. It is easy to see how cutting back on some of the luxuries saves a fortune. Some believe that high speed internet, maximum cable service, and unlimited cell phone calling plans are necessities in life. They are wonderful items if you can afford them. However, when one is in dire financial straights, these are some of the areas to regain funds.

Step 2: Apply the additional funds to the lowest balance card

This is where a lot of financial people will squawk. Their philosophy is to apply this money to the card with the highest interest rate. While this makes sense on paper, it does not take into the account the mental aspect of life. People who are in debt feel that they are underneath a mountain. The outlook is dark in the best of circumstances. When individuals make the necessary cutbacks previously mentioned, it is extremely demotivating to see a lack of progress. Paying the smallest balance first improves the mental makeup.

Here is how it works. One continues to make the minimum payment on all the high balance cards. The additional $200-$300 is applied to the lowest balance card. Lets say that $600 is owed and we are able to pay $300 a month. Obviously the balance will be paid off in 2 months. This gives one an incredible sense of satisfaction. It is easy to see that some progress was made. After the first card is paid off, the money that was used for that one is applied to the minimum that was being paid on the card with the next lowest balance. Thus, if $30 was being paid, the minimum remitted will be $330 ($30 + $300). Again, we pay this until this balance is eliminated. This continues until all the debt is paid back.