Debt and Taxes – Part 3

Continuing on from where I left off yesterday, how do we become more financially free?  Debt is not the new inevitable item adding to the death and taxes list.

After changing the way you think about debt (part 1) and developing a budget (part 2), you need to develop a plan.  First look at the balances on all the credit cards you currently own.  Go to the one with the highest interest rate and the lowest balance first.  Look at the minimum payment amount and double it.  If it says you must pay $75 per month, pay $150.  Continue this until it is paid off.  The important thing here is to not stop paying all the other debt you have.  If your situation is like most Americans, you have multiple credit cards.  So your next step is to apply that same $150 to the minimum payment you have been making to the next lowest balance credit card which has a minimum payment of say $80 per month.  Once you have paid off the first and are working on the 2nd, you must make a committment not to carry balances on that first paid off card. Applying the original doubled payment ($150 in our example) to the minimum payment of each successive card.  Card number three has a $45 minimum payment and would get $230 plus $45 paid to it each month.  You continue on until all credit cards have a zero balance.

I would recommend that you only have one credit card that you use consistently.  This card can be used for all monthly purchases and paid off each month.  Not only does this develop good financial discipline, it also helps build a good credit score which will be used if you ever need a new loan in the future.  Some employers even look at your credit score before hiring you to assess the risk of you stealing from them.

Once all credit cards are paid off, you take all the money you were paying monthly on the old balances and put it toward the highest interest rate lowest balance consumer loan.  This means auto loans, student loans and some equity lines.  If you have any payday loans, this would naturally be next in line.  Follow the same process of minimum plus the extra until all have been paid off.  While in this step, you will see that you have extra cash available.  This can be used for emergencies like car repairs and health care if needed.  You now have some flexibility!  Once you have completed your consumer loans, take the amount of money you would spend on a car payment and put that monthly into a savings account.  Ultimately, you will have enough to pay for a nice used car should the one(s) you currently have need to be replaced.

Last but not least, the mortgage.  Whatever is left after your car payment to yourself, simply apply that extra to the mortgage principle balance.  You do need to check and see if your mortgage has any pre-payment penalty terms obviously.  You don’t want to be charged for paying down debt.

This sounds simple and is a short description of a positive process.  It can take many years to clean up debt.  Patience is of the utmost importance.  What is the alternative though?  More debt? Status quo?  No!  By taking charge of your finances earlier, you can reach financial freedom earlier!

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