How to Get Out of Debt Part II

Continuing with our miniseries on getting yourself out of debt, we tackle the concept of payment plans. Click here to read How to Get Out of Debt Part I.

5. Set up a payment plan; yes, the dreaded “budget” word. Luckily, you’re already partially there because you’ve listed all your debts. If you have one and know how to use it, list everything in a spreadsheet program because this will make it easy to track, or at least set everything up. Here’s what you want to do.

First, figure out which bills are due when. Base it off either your one week or two week payment schedule; if you get paid once a month, you can skip this part. Set up a schedule where you know when you’ll pay which bills for at least six months.

You’re probably wondering why. Earlier we figured out what your net income was for 26 weeks. However, most people budget for twice a month payments, which means you actually get two extra weeks of payments a year. So, what you’ll find is that, if you extend your budget for six months, you’ll gain a pay period, and thus earn yourself a little benefit and boost which you’d have never known about if you hadn’t budgeted.

Something else you’ll do with your payment plan concerns your credit card payments. There are three schools of thought on this one. The first says to tackle the card with the highest interest rate first. The second says to go after the cards with the highest balances first. The third says to go after the cards with the lowest balances first. Let’s take a look at each of these.

The cards with the highest interest rates add more to your balances on average than other cards. Going after these balances saves money because it saves on the amount of interest you’re getting charged for.

The cards with the highest balances are the ones that make you feel beaten up and overwhelmed. If you go after these balances first, as you see them coming down your stress level will decrease.

My favorite, however, is going after cards with low balances first. The principle behind this is that everyone works best when they can see successes. The quicker you can pay off a balance, the better you’ll feel, and you’ll be ready to tackle the next card.

Of course, the idea behind all three of these ideas is that, whichever one you select, you pay more than the minimum balance, at least 50% more if you can afford it, and stop using all of your cards except possibly one; we’ll come back to that concept. Then, when you pay off the low balance card, you take that payment and apply it to the next lowest card, and so forth.

The thing is, if you have a low balance with a high interest rate, this is a win-win. If your highest balance is also your highest interest rate, you’re heading towards trouble quicker, and you just might have to go after that one first, bringing the balance down to a safer level before going after one of your other cards.

Why do I recommend you keep one card going? The reality is that if you can use one of your credit cards for small purchases, what you’ll have to pay the next month is relatively low compared to having to pay cash for everything. You don’t use it for everything in a month, just a couple of things. If you put gas in your car weekly, maybe throw one of those weeks onto your credit card. Maybe one week in the month use your credit card for the purchases. This is extreme, but if you have the space on the card it might help for a quick fix, though we’re weaning you away from credit cards eventually.

See more:
How to Get Out of Debt Part III

75 Painless Ways to Save Money

8 Simple Ways to Save Money

7 Days of Money Saving Tips