Learn How to Pay Off Debt

It is important to have a plan when it comes to extinguishing your debt. What plan should you adopt in your efforts?

There are a couple of different approaches that have been recommended for paying off debt, and each has its place. The approach you take will depend largely on your individual situation. Let's take a look:

Debt Relief on a Tight Budget

With no disposable income or savings to apply to your debt, you want to take a specific approach to paying it off. The first step is to find at least $100 a month from somewhere else in your budget to apply to your debt.

This $100 is important and will accelerate your ability to crush your debt. If you aren't sure how you'll free up $100 a month, remember how great it will feel to finally be out of debt. You want it badly, more than almost anything else. Cut something out if you have to. It's so worth it!

After you have freed up that $100, it's time to get started. Make a list of all of your debts across the top of the spreadsheet (or whatever you use) in order of the number of minimum payments left to pay off the debt, from least to most.

You want to approach it this way instead of by interest rate because your highest interest rate debt may have the most payments. By the time you pay off the this debt, all of your others will have been paid off.

Start with the debt with the fewest payments left and once it is paid off, you can use its payment and apply it to the next debt. Once that one's gone, you apply the whole amount to the next, and so on. Get a visual of this method by clicking here.

This method is the quickest way to get out of debt if you can't apply any outside funds. If you view the document linked to above, you will see how you can speed up the repayment of your debt without increasing the total amount of money in the right hand column.

Don't give in to the temptation to use the money from one of the paid off debts for something else. Apply it to the next debt until it is all gone. This is the quickest way to do it. You can't use that money for anything more important.

Using Discretionary Income

If you have a fair amount of savings or discretionary income you can use in paying off your debts, you will want to pay off your debts according to interest rates.

Make a list of your outstanding debts (use a spreadsheet software if you have one) in order of interest rates, highest to lowest. Include the following information:

Include the principal or balance, the interest rate, and the minimum payment amount. These items will help you keep track of the details for each type of debt.

Because you have some savings or discretionary income you can apply to these debts, you will want to attack the debt with the highest interest rate first. This will ensure that you are getting rid of the most expensive debt first.

As you continue to make minimum payments on all of your debts, apply as much of your discretionary funds to the debt. The more you can put into it, the quicker you'll get it paid off.

Any income you are putting into savings, besides your matched contributions to a 401k, should be redirected to your highest interest debt. There's no reason to be funneling money into an investment that earns you 8% when it could earn 12% by paying off your 12% APR credit card.

Continue applying the same amount you dedicated to paying off the first debt to the rest of the debts until they are all gone.

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