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Debt Reduction Methods (Tips can be found below)
A budgeting excel sheet version 2007 is available here
There are 3 main steps in getting out of debt:
1) Know your income amount (monthly/weekly)
2) Know your debt amount (monthly/weekly)
3) Knowing when you have small amount of free money
There are 3 big methods for getting out of debt with your own money:
1) Debt Snowball
2) Debt Avalanche
3) Debt Stacking
There isn't a best one for all situations.
Each helps in a different way. Which way benefits you the most? That is the question.
This guide is somewhat based on information from the Excel sheet but can be utilized without the Excel sheet
Step 1 & 2) Knowing your income and Expenses:
- Use the excel sheet or a piece of paper to write down your income type (salary, hourly)
- Figure out your income based on what you enter/write down
- Do the same for your expenses and group them by recurring (monthly) required spending
- Write both your income and expenses in big letters and circle them if you have too.
In the case that you earn $2375 each month and your expenses are $2275, this means you have 100 extra dollars.
Your DTIR would be: 95.8%. This puts you in the High-DANGER ranking
98% is a critical number. Bankruptcy is a real possibility from 96% up
In a case where you have an income of $1,500 per month and an expense set of $1,600, you are $100 short. In most instances this is because of a heavy section of bills during say the second week of each month. In the event that the other two or three weeks you $10.00 left in your account come payday, this actually means 3 weeks you could save 6.7% of your extra money. That looks close to this
Expense: 1600 / Income : 1500 = DTIR @ 1.0667
This shows you have 6.7 percent more debt than your income
That is where 6.7% comes from...
Mean Weekly bill amount : $400
The above chart shows an income of : $1,500
and expense of : $ 1,590
It shows that have $15 extra dollars in the 1st week of the month.
6.7% of $15.00 would be $1.00
Save 1 dollar when you can. Use an envelope or a safe.
If at no point you have extra many times changing your due dates around can help. This typically will cause a situation spin. This is when changing two of your smaller bills around equals as much as one of your big bills and then you change their due dates.
If you have three bills and they are like this:
Gas : 13th : $200 : Big
Cell Phone : 12th : $100 : Small
Car Insurance : 11th $180 : Big
$490 expense in 3 day period
Many times if you take smaller bills and switch them out like this it can help immensely:
Gas, cell phone, insurance = 480 @ week 2
water, electric, car payment = 360 @ week 1
Take the water, electric(week 1) and insurance (week 2) payment and switch them around so maybe like this
Insurance = $180 (11th)
Water = $50 (2nd) ; Electric = $120 (3rd) ; Car payment = $190 (4th)
Cell Phone = $100 (12th)
By changing the dates of your water and electric to the second week and setting your car insurance to the 1st week;
it would look similar to this:
Week 1 expenses from : $360 to $370
Week 2 expense from : $480 to $470
Now by moving your cell phone to week three and bring two smaller bills into week 2; it could look like this:
Sewer = $90 (22nd)
Medical bills = $170 (23rd) ; lawyer fees = $115 (23rd)
Gas = $200 (13th)
By changing the dates of your gas(week 2) and sewer fees (week 3) to the second week and setting your car insurance to the 1st week;
it would look similar to this:
Week 1 expenses stay : $370
Week 2 expense from : $470 to $360
Week 3 expense from : $375 to $485
Sewer and lawyer fees(week 3) for gas (week 2) would look like this:
Water = $50 (2nd)
Electric = $120 (3rd)
Car payment = $190 (4th)
Gas = $200 (13th)
Cell Phone = $100 (12th)
Insurance = $180 (11th)
Sewer = $90 (22nd)
Medical bills = $170 (23rd)
lawyer fees = $115 (23rd)
Week 1 expenses stay : $360
Week 2 expense from : $470 to $475
Week 3 expense from : $375 to $370
The above situation is undoubtedly difficult to manuever in.
Please remember the above is a sample and your situation is probably very different.
You should inspect your situation using the above layout.
Rarely, changing dates does not help, but it does occur.
Tips:
1) Other things to try is boosting your income by combining with someone else
2) Watch for bank sales. Every so often, banks give free money for opening an account.
A minimum initial transfer is usually required. Most of the time it is under $100.
Borrow the money from someone (interest free if possible).
This allows you take advantage of the free money
at no risk to your investor.
3) Re-finance your house (not a second mortgage)
Use the money to pay off your smallest debts first regardless of interest rates
Debt Methods:
1) Debt Snowball -
On more than one account, pay off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later
* List all debts in ascending order from smallest balance to largest.
o This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
* Commit to pay the minimum payment on every debt.
* Determine how much extra can be applied towards the smallest debt.
* Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
o Note that some lenders (mortgage lenders, car companies) will apply extra amounts towards the next payment; in order for the method to work the lenders need to be contacted and told that extra payments are to go directly toward principal reduction. Credit cards usually apply the whole payment during the current cycle.
* Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
* Repeat until all debts are paid in full.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling
downhill gathering more snow
2) Debt Avalanche -
On more than one account pays off the accounts starting with the smallest balances, higher interest rates first, while paying the minimum payment on larger debts.
Once the smallest debt with the highest interest rate is paid off, proceeds to the next slightly larger small debt above that, so on and so forth, gradually proceeding to the larger ones later
* List all debts in ascending order from smallest balance to largest.
o The order is determined by the rate of interest charged.
* Commit to pay the minimum payment on every debt.
* Determine how much extra can be applied towards the smallest debt.
* Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
o It is extra important in this method to make sure your overpayments go directly toward principal reduction.
* Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
* Repeat until all debts are paid in full.
In theory, the money paid on the principal makes the remainder of interest payments all lower. This could save a lot money over a period of time where high interest is applied, thus causing an avalanche applied toward the debt
3) Debt Stacking -
Under this strategy, you make your minimum payments on all of your bills but send all of your extra money to one bill to get it paid off more quickly.
Once you pay off your first bill, you take the money you were sending that creditor and send it to the next one down the line together with the minimum payment you were sending that creditor.
As you pay off bills, your monthly payment for the next one goes up even though you are not spending any more of your own money.
Generally, when you do debt stacking, you pay off your debts in order based on their interest rates, with the highest rate debt being paid off first.