Tuesday, 5 January 2016

Debt-Laden: Stopping the Cycle

How get control of your debt

No matter how much you plan for it, spending always seems to get a little splurgey over the holidays and leaves a lot of people feeling strapped for cash in the New Year. Whether you've got some recent debt to get paid off or have been struggling to keep up with your bills for awhile, there are a couple of methods you can choose to help get you current. 

This feels like a timely post because not only are people struggling with holiday bills but, as we all know, the economic conditions in Alberta are less than stellar. Too many people are facing a job loss, and it is so easy to get into debt when you don't have money coming in the door, even if it's just for a few months. I get it, debt has become such an accepted part of our lifestyle but let's see if we can get organized (and motivated) to kick that habit and start getting ahead.

There are two primary methods for debt repayment, and we're going to look at both of them. In my opinion the first option is the way to go, but both options will work, the most important factor is getting started and sticking to either system. The other thing you're going to need to do is stop charging things and increasing debt. You're going to have to start living off cash and debit, at least until all your debt is cleared. As I've said before, I'm not against using credit cards for your spending, but I am if you're not paying off the balance in full every month. 

One little tip to do before you choose a method is to get on the phone with all of your credit card companies and ask them to lower your interest rate. It might not earn you a huge drop, but even small amounts on a couple of cards will add up. I think it's a worthwhile step if you've got a bit of time.

The Debt Avalanche Method
Up first we've got the ladder method where you basically pay off your debts from highest interest rate to lowest interest rate, simple right? What you want to do is make a list, on a napkin, post-it, fancy spreadsheet; whatever you want just go and do it. The information you're going to want to jot down is what the bill is, current balance (approximate is fine), interest rate, and minimum monthly payment. You'll need this list for either method so seriously, if debt is a problem for you go do this right now....I'll wait. Ok, done? Perfect, for the ladder method you're just going to order that list from highest interest rate to lowest interest rate. Now the organization part is done, so easy. The hard part (but rewarding!) comes now that you actually have to start paying! What you're going to do EVERY MONTH is pay the minimum amount on all of the debt items except for the highest, for that one you are going to put on every last dime you don't need to live on (time to get cheap folks). Then once that top one is paid off you just keep moving down the list until everything is all paid up in full, and then celebrate...but not on credit :)

DEBT NAMECURRENT BALANCEINTEREST RATEMINIMUM PAYMENT
The Bay Card$390.0018.99%$11.70
MasterCard$12,325.0011.90%$370
Visa$870.0015%$26.10
Student Loan$10,500.005%$315.00
Car Loan$4,500.003%$135.00
The ladder method will end up being saving you a few bucks in interest charges over the life of your debt which is why it's my first choice, but if you think you would benefit from some quick wins, then you should keep reading as the next option may be a better fit. 

The Debt Snowball Method
The snowball method was made famous by personal finance guru Dave Ramsey who's an author, speaker, blogger, etc. If you want some more reading his book 'Total Money Makeover' is a good read, it can get a little preachy but his basic concepts are solid. In his method, you are going to take that same list of all your debt but instead of organizing it by interest rate you are going to rank it my current balance, and this time from smallest to largest. Then you do the same thing, pay the monthly minimums on all but the first (smallest) balance and knock them off one by one. The idea behind this is that the small and quick wins at the beginning will boost your motivation to tackle the larger balances down the page. 

DEBT NAMECURRENT BALANCEINTEREST RATEMINIMUM PAYMENT
The Bay Card$390.0018.99%$11.70
Visa$870.0015%$26.10
Car Loan$4,500.003%$135.00
Student Loan$10,500.005%$315.00
MasterCard$12,325.0011.90%$370
Everyone picked their poison? Honestly, don't think too hard on this one, just go with your gut and move on. The real brain power will come when you start working out your budget and figuring out all the ways you can pinch some pennies to get the debt repayment rolling. I've got your back though, keep your eyes on the blog for a post in the next couple of days. 

How get control of your debt

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