As discussed here, when Hubby and I moved in with family, our focus was to pay off all of our consumer debt within our timeframe of 12 months. We set a specific dollar amount goal to have paid off by May of 2012. For this installment of "financial fitness", we're on to discussing our debt payoff plan.
Step One AKA “the eye-opener”: We took stock of all of our debts from various places including general credit card debt, department stores, medical statements, etc. We created a spreadsheet with all of our debts and included the following:
- The debt source {name of department store, credit card, etc.}
- Current balance
- Interest rate {if promotional rate, the date that the promotional rate ends}
- Minimum payment due
Step Two: We then organized our debt from smallest to biggest. We did not pay attention to the interest rate. This is a philosophy I was very skeptical about when we first started. I thought it would make the most sense to pay off higher interest rate debts first. However, it proved successful as we maintained our motivation to pay off debt. The results are fast, as it is easier to knock out the lower balance debts.
Here is an example of debts from least to greatest including balance, interest, and minimum payment amounts:
Debt | Balance | Interest | Minimum |
One | $350.00 | 11.00% | $35.00 |
Two | $500.00 | 7.00% | $30.00 |
Three | $500.00 | 10.00% | $40.00 |
Four | $700.00 | 7.00% | $35.00 |
Five | $700.00 | 10.00% | $30.00 |
Six | $850.00 | 7.90% | $35.00 |
Seven | $4,000.00 | 9.99% | $30.00 |
Total Debt | $7,600.00 | $235.00 |
Note: To add all the columns together, simply apply the "sum" formula to give a total for all selected columns.
Step Three: Now that debts are arranged from least to greatest, we tallied up the minimum payments for each card. Then, we took the amount that we set for debt payments from our budget, minus the minimum payments. This gave us the extra amount to apply to our debt. It ends up looking like this {this example uses the debt breakdown above}:
$900 {debt budget}
- $235 {minimum payments}
= $665 {extra debt payment}
Step Four: We then add the “extra” to the minimum payment of the first debt {the smallest debt}. Repeat every month to knock out debt from smallest to largest. This creates a “rolling” effect that accelerates the debt payment process.
An example of rolling debt payments:
Debt | Minimum | Extra | Revised |
One | $35.00 | 665 | $695.00 |
Two | $30.00 | 665 + 35 | $730.00 |
Three | $40.00 | 665 + 30 + 35 | $770.00 |
If “revised” amount is greater than debt owed, simply apply to the next debt. As debts are paid off, we continue to roll the minimum payments from the previous debt to achieve a greater revised payment for the current debt.
{Rinse. Repeat Step Four. Every Month.}
Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers.
