Debt has all so comfortably been hailed the American way of life. According to the American Household Credit Card Debt Study published by the Federal Reserve Bank of New York, the average American in Debt carries $16,425 in credit card balances, which cost them approximately $1,300 a year in interest payments!
So, what do you do when you are drowning in debt? To be fair the increase in debt is not solely driven by an increase in lifestyle. According to Motley Fool, the rising medical and housing cost have grown at a much faster rate than income, which has resulted in Americans using their credit cards to make ends meet.
What's the Solution?
I am a supporter of Dave Ramsey's approach to using the snowball method to pay off debt fast! This approach is designed so that you tackle your debt in chronological order from the smallest to the largest.
It may not always be the most appropriate when paying off debt with lower interest rates prior to paying off debt with higher interest rates since this will cost you more in interest expense. However, the psychological aspect of tackling the smaller debt first tends to motivate individuals to stick to the debt repayment plan. You should commit to a debt repayment plan that keeps you motivated until it is paid in full. Be sure to consult a certified financial planner for guidance on paying down your debt as every situation is different.
If you decide to use Dave Ramsey's snowball approach to eliminating debt fast, here are the steps you must take:
- Make a list of all your debts from the smallest to the largest balance
- Make a list of all the minimum payments you are currently making toward each debt
- Determine how much additional money you can apply to your debt
- Take the additional money and add to the payment of the smallest debt
- Once the smallest debt is paid, take its payment and apply it to the next smallest debt, continuing to make minimum payments on all the rest.
- Repeat until all debts have been paid off
|Credit Card 1||$700||15%||$25|
|Credit Card 2||$1,200||20%||$50|
If you make the minimum on everything and add an extra $200 to the smallest debt-Credit Card 1, you will pay it off in approximately 4 months.
Then you will tackle Credit Card 2 with $275 per month ($200, plus the $25 from minimum on Credit Card 1, and $50 from minimum on Credit Card 2), you will pay it off in another 4 months.
Now you have $459 ($275 plus $184) that can be used to pay down the Car Loan, you will have it paid in about 20 months!
When you start paying off the Student Loan, you will have $724 ($459+$265) to eliminate your debt and you will be debt free in another 29 months!
The debt snowball method is an extremely powerful method. Once you get started, you are motivated to stick with it. Once you have all the debt paid, you can now start to use that money towards savings and investments!