As promised after this last week’s message, here is a guaranteed plan for getting out of debt.
1. List all your debts
List all of your debts and arrange them in order of how quickly you can pay each one off from fastest to slowest. For example, if you have a medical bill in the amount of $1000 with no interest and a minimum monthly payment of $100 and a credit card with a balance of $3000 with interest rate of 20% and a minimum monthly payment of $100, you can eliminate the medical bill more quickly than you can the credit card. Yes, this goes against the wisdom of those like Dave Ramsey who advise to take the debt with the highest interest and pay it off first. Their advice is that the interest rate is rapidly increasing your debt and you should pay those off first. However, I believe it is more of a cash flow problem. You need to free up cash flow as soon as possible to eliminate debt so pay off the debt that you can eliminate the quickest.
2. Eliminate the debt you can pay off the quickest.
Pay the minimum monthly payment on all your debt except for the one you can eliminate the quickest. Divert any extra cash flow you can to pay that debt off as quickly as possible. Look into ways to make extra money. List things for sell online. You don’t really need your kitchen table! Sell it. You can replace it when you are debt free and can pay cash for it! Think of any way you can earn some extra cash to accelerate your first debt payoff. And make sure you are putting the extra cash onto your debt payment not going out to eat on it.
3. Snowball your debt payment.
Once you eliminate the first debt, celebrate! And then take the payment you were making on the debt you just eliminated and add it to the next debt. Continue to make the minimum monthly payment on all of your other debts. For example, let’s say you just eliminated a $1000 medical bill and were paying $150/month on the medical bill. Your next debt is a credit card with a minimum monthly payment of $100. You are now paying $250 a month on the credit card payment. You have snowballed your debt payoff. And you do that until you eliminate all of the debt you are hoping to eliminate.
4. Do not accumulate any new debt.
Most importantly…do not continue to accumulate debt while you are eliminating debt. That’s like digging a hole and someone throwing the dirt you are shoveling out back into the hole. Make a commitment to live below your means and not take on any new debt.
This plan is 100% guaranteed. I know, because I did it. And you can too!
Ryan Smallwood
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