If you are committed to reducing your
debts and are willing to cut down on unnecessary expenses,
it is indeed very possible to succeed in what's called a "Do It Yourself Debt
Reduction" plan. Why do you need to go
out and pay debt counselors or credit counselors big hefty
fees when you can reduce your debts on your own?
article, we will articulate the steps required for a successful
debt reduction plan:
1) Evaluate Your Debt
In Excel or on a piece of paper, write
down the following characteristics on each credit card debt
- Interest Rates Charged (APR)
- Monthly Payments Due
Apart from credit card debt, do the above step for
all other types of debt including your payday loans, auto loans, personal
loans, etc. Omit writing down your mortgage loan or your student loans
because they have relatively lower APR and can be paid off over the
2) Calculate Your Household Budget
In Excel or on a piece of paper, write down your monthly
income (after-taxes) and subtract from it the following items:
- Monthly rent/mortgage payments
- Car Insurance
- Television/hydro/other utilities
- Childcare expenses
- Medical expenses
After subtracting all these amounts, arrive at your
Disposable Income figure. If this number is too low, look for ways to
cut down on your spending so that you have more disposable income at
the end of the month. Remember in the introduction of this article,
we said you could be successful at Do It Yourself Debt Reduction only
if you are willing to cut down on unnecessary expenses.
3a) Pay Off Debt with Highest Annual Percentage Rate
Consider the following example. Peter has an after-tax
monthly take home pay of $2000. After paying off all his expenses every
month, Peter has $450 remaining to pay off any debts owed. He should
therefore allocate this $450 towards paying off debt that has the highest
Annual Percentage Rate (APR). This is the fastest way to reduce
|After Tax Monthly Take
|Student Loan Payments
|Remaining amount goes towards paying
off debt with highest APR
Continue this process every month until the debt with
the highest APR is fully paid off. Once it is fully paid off, move on
to the next debt that has the highest APR. We make a few assumptions
in this Do It Yourself Debt Reduction Plan:
- You are not racking up any more debt on your credit
To achieve faster debt reduction, try to cut down
on some spending such as "Groceries" or "Utilities"
and allocate more of the saved up money towards paying off debt. Track
your spending by doing this:
|Estimated Debt Payment
3b) Debt Repayments Worksheet
Here is a sample Debt Repayment Schedule that
you can use. It is also self-explanatory.
1st, 2006 - Feb 28th 2007, you will make an additional $128
per month payment towards your Walmart Credit Card and pay
it off in 2 months. By tightening your budget and cutting
down on unnecessary expenses, you will get rid of your Walmart
Credit Card debt in 2 months! You will then use the freed
up $72/month to pay off your next debt, the Sears debt.
|By combining the
current $60/month debt payment with the $72/month extra payment
saved from Debt #1 (the Walmart Debt), you will be able to
pay off the Sears debt in ($600 / $132) roughly 4.5 months!
Upon then, you will have an extra $132 per month to pay off
your next debt, the Wells Fargo Debt.
|iii) Wells Fargo
|By combining the
current $120/month debt payment with the $132/month extra
payment saved from Debt #2 (the Sears Debt), you will be able
to pay off the Wells Fargo debt in ($1500/ $252) roughly 6
months! Upon then, you will have an extra $252 per month to
pay off your next debt, your Federal Student Loan.
|iv) Federal Student Loan
|By combining the
current $100/month debt payment with the $252/month extra
payment saved from Debt #3 (the Wells Fargo Debt), you will
be able to pay off your Federal Student Loan in ($3000/ $352)
roughly 9 months! Upon then, you will have an extra $352 per
month disposable income!
Use our sample debt repayment schedule above
to enter in the following characteristics:
- Interest Rate Charged
- Current Monthly Payment
- Additional monthly payments you can make (after
careful budgeting and cutting down on expenses)
Rank your debts according to their relative interest
rates. The debt with the highest interest rate is #1, the debt with
the 2nd highest interest rate is #2, and so on. Make additional payments
one debt at a time (debts with the highest APR charged). Trust me, this
is the fastest way to eliminate credit card debt and you shall be happy
with the results!
4) Debt Negotiation
Whilst carrying out Steps 1-3, you should contact
your creditors and negotiate your debts with them. This is also known
as the process of debt negotiation. Some lenders will be willing to
lower your Annual Percentage Rate (APR) so that you have to make less
monthly interest payments and pay off the original balances faster.
You could also carry out balance-transfers where you move credit card
debt from high interest rate credit cards to ones with lower interest
rates. For example, if you move your $7000 debt from an 18% APR credit
card to an introductory 0% APR card for 6 months, you could save a lot
of interest payments.
5) Keep Track of Success & Failures
If Peter (in the above example) makes a payment of
$450 or more towards his highest APR debt, then he will reduce his debt
very fast! Whenever you achieve a milestone in debt reduction, do celebrate
it! Look at areas where you can cut down spending and allocate that
savings towards paying off your debt. Keep a progress chart sheet on
your refrigerator on near your television that reminds you Debt Reduction
is your #1 short term goal!
Felix Cruet Comments on August 6th, 2007
Could you please send me info on how to eliminate
or pay off my student loan?
Anette Comments on April 26th, 2007
I would recommend that serious debtors join Debtor's
Anonymous. DA is free and has weekly meetings to educate and motivate
it's members. In addition, you can request a pressure relief meeting
with two ex-debtors to help you figure out how to pay off your bills.
It's a real life saver!