5-Day Debt Reduction Plan: Add It Up

By Mikey Rox on 7 June 2016 0 comments

[Editor's Note: This is part two of our five-part series on debt reduction. To read more, see the rest of the 5-Day Debt Reduction Plan.]

Excuses and bad habits might have stopped you from achieving financial success in the past, but now that you're ready to tackle debt like a boss, it's time to get down to business. Paying off debt is hard work. In fact, it's probably one of the hardest financial challenges you'll take on, aside from actually making the money you'll need to pay it off. Considering that then, you won't get far without provisions in place.

See also: 5 Steps Toward Financial Independence

To get to the finish line — or even come close to it — you'll need a certain amount of courage to attack your debt head on. It's a frightening prospect, for sure, and maybe you've tricked yourself into believing your debt problem isn't that bad. While this mindset might help you sleep better at night, it doesn't reduce balances. So before you can move forward in this process, you have to add up what you owe. Chances are, the final number will be a scary one.

1. Decide Which Debts to Include in Your Payoff Plan

Some people come up with a plan to pay off all of their debt, including student loans, auto loans, and mortgages, whereas others focus on unsecured debts like credit cards and personal loans. All debt isn't created equal. We're focusing this plan on credit card debt which can have more of a negative impact on credit scores and usually comes with higher, often much higher, interest rates.

2. Take a Few Minutes to Gather Your Statements

Since you're adding up what you owe, create a simple spreadsheet to record this information. It's important to get everything down. Some people have no idea of how much they owe. They might have an estimated number in their head, but it's not until they see their debt on paper that they're able to grasp the severity of a situation — and subsequently reach for a solution (or a drink).

3. Next, List All Your Debts

Include detailed information about your debt, such as your current balances for each account, minimum monthly payments, and interest rates.

Your spreadsheet might look something like this:

 

After writing down your debts, calculate the total balance and total minimum payment due. You'll see how much you owe down to the cent, as well as how much you're currently paying in minimum payments each month.

The Cost of Minimum Payments

Debt elimination works best when you set attainable goals for yourself. I've harped on this practice in plenty of my Wise Bread posts before and I can't stress the importance of goal setting enough. It isn't enough to know your numbers; you need a plan that allows you to pay down balances sooner rather than later, or else you could carry debt for decades and pay thousands of dollars in interest. You also need to do it in a reasonable way so you'll stay on track.

At $10,000, your total minimum payments due is $200 (credit cards usually charge between 1%-3% of the balance due as their monthly minimum payment). The following month, your minimum payment due will be lower, because your balance is (slightly) lower. But if you follow this course and only make the minimum due each month, it will take you 50 years to pay that off, along with paying over $28,000 in interest. I'm sure you don't want to hold on to that debt for decades, nor pay tens of thousands in interest.

If however, you kept your monthly payments at $200, you'd be debt free in eight years, and the interest you'd have paid would be $8,916. See the difference?

See also: Stop Paying Credit Card Interest with a Balance Transfer

Set Achievable Goals

Understandably, you want the balance gone within the next few weeks or months. But you have to be realistic. Unless you strike gold or get a windfall (or start being really really nice to the old rich person down the street), you probably won't be able to pay off $10,000 in credit card debt in three months. But you definitely can punch those numbers and get out of debt in less than eight years.

See Also: Fastest Way to Pay Off $10,000 in Credit Card Debt

Let's say that you are able to find an extra $300 a month in your budget to steer toward debt reduction, bringing your total debt payment to $500 per month (your current minimum due plus $300). Without interest to pay, you'd knock this down in just 20 months! Unfortunately, you actually do have to pay interest until your debt is cleared.

The average interest rate on your $10,000 is a whopping 17.88%. (Ouch!) That means it'll actually take you two years and almost $2,000 in interest, (still a huge improvement over the eight years and almost $9,000 in interest if you just paid $200 per month).

Every little bit you can add to your monthly debt reduction budget helps. For example, if you can increase your monthly payment by just another $50, your debt is gone in 22 months, and you'll have paid $1,600 in interest.

The key to remember is that small amounts really do add up over time. The more of those small amounts you can find and put to work for you, the faster you will be able to eliminate your credit card balances. You won't get out of debt without making some sacrifices, however. Which leads us to the next step in this series: How to search for unnecessary costs and destroy these to improve your cashflow and free up more of your money to retire debt.

Debt Management Resources

Have you recently chipped away at a decent amount of debt? How did you do it? What tactics did you employ? I'd love to hear from you in the comments below.

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