Paying off Debt, the RIGHT way!!!

Paying off debt can be a hefty task. Do you pay the higher interest rate first? The lowest? Do you send a little extra to all the bills? These are questions that are on everyone's mind when it's time to pay the bills... so why is it that most people don't ask someone how to do it correctly?




There are many ways to pay off your high interest rate debt (most don't work so great). So many of us get caught up in the "I want it now" mentality and end up stuck with some pretty big bills that most of us end up only paying the minimum payments on. The real question is... how do I pay off my debt correctly?



There are many schools of thought on this subject, but there is really only one that I have seen work and have used myself succesfully.



Debt Snowballing. This the most popular method and actually has 2 different ways to accomplish the same task.



List all of your debts, in descending order by interest rate, regardless of the balance (accounts with highest interest rates first).



Determine the most money you can make available from your budget to apply to the debt snowball. The more you can apply, the more money you'll save and the faster you'll pay off your debt.



Each month, apply the minimum payment PLUS the extra money you've made available from your budget to the first debt (the one with the highest interest rate). On all your other debts, pay only the minimum payment. Continue to do this until the first debt on the list is paid off.



Take the minimum payment AND the extra payment you were making on the first debt and add them to the minimum payment you've been paying on the second debt. Pay that amount on the second debt each month until it's paid off, then move on to the third debt. Continue to pay only the minimum payment on all debts except the one you're "snowballing."



Repeat this process until all of the debts are paid off.



This method is actually the most effective, fastest and cheapest way to pay off your debt.





Some others recommend listing your debts with the smallest balances first so you can get the emotional satisfaction of quickly crossing off a debt or two, in the hopes that this emotional satisfaction will keep you motivated, but this one costs you more in the long run.



Now, here are some questions that people ask all the time:

1. Does this really work? Yes it does, and it's proven with sound calculations of how interest is charged to each account

2. What if i fall into extra money, what should I pay first? If your following the methods above, you would use any extra money you want to pay towards your debt on the account your paying the "extra" money on every month, the faster you get rid of the higher interest rate debt the more you save!!

3. what if I don't have the extra money one month? send in at least the minimum payment to each debt and then start again the next month

4. I can't help myself, I feel the need to pay a little more to all of my debt? DON'T!!! Save yourself years and a lot of extra interest charges and STICK TO THE PLAN!!!

5. Do I treat credit card debt and car debt the same way? This is tricky, because these two different types of debts are not calculated the same way. But unless you have the greatest credit card interest rate on the planet, or you have a REALLY bad rate on your car loan, odds are, it's best to pay off the credit cards first.

6. What if I have a mortgage and a home equity line of credit? This is actually a great question, it's best to put extra money down on your mortgage principal. The reason say this is, your mortgage is usually over a 30 year period, so any principal on the mortgage gets charged interest for a much longer period of time, any time you can decrease that amount, the less interest you pay over the long run. Some models have show (and have been proven) that if you pay just $5000 to your mortgage principal it can save you $20,000-$40,000 in interest over the years (of course this is all dependant on your loan, interest rates etc, but you can see the power of paying down the principal on your mortgage payment)



Well this was just some information on how to pay down your debt faster and save you $$$ in interest. I hope this helps...