This week, I would like to talk about getting out of debt. Last week, we talked about what debt is in Debt: what is it. If you didn’t get a change to read it, read it first. In this post, I will discuss, why we are in debt and how to get out of debt.
Why are we in debt
That’s the first question we need to ask ourselves. Some of the reasons we are in debt is we want to impress other people, we don’t live within our means, or we don’t have a plan. You see a credit card can let you spend way beyond your means. If you need extra money for food this week, put it on the credit card. If you want to watch a movie and don’t have the money, charge it. Now the next month you may have a $500 credit card bill and you still don’t have enough for food so the cycle repeats itself.
Have a plan
Which leads me into my next point, you don’t have a plan. This one had me trapped up for years. Needless to say that for years I was not on a budget. I would pay my bills then the rest of the money was for me to spend. That is no way to live your life. So you need to have a budget. I don’t care if you use Mint, Every Dollar, or pen and paper, tell your money where to go every time you get paid.
How do we get out of debt
First, I want to say that getting out of debt in not easy. You may wander into debt, but you can’t wander out of debt. Jesus revealed this quote to me: if you are not intentionally or have the desire to get out of debt, you will never be debt free. With that said, how do we get out of debt? It’s a three step process, step one, gather all your debt’s together. I am talking all your debt payments: credit card bills, your mortgage, car payments, loan payments, and medical payments. Step two, take all your bills and put them in order from the least to the greatest balance shown on each statement. Then write the name of the bill, the balance, and the minimum payment on a sheet of paper. Step three, take the first bill at the top of your paper and pay as much as you can on that bill until the bill is paid. While making minimum payments on the rest of your debt. Mark that bill off your list, then go to the next bill on the list. Apply what you were paying on the first bill to the minimum payment on the second bill. Once the second bill is paid off, mark that bill off your list and continue the plan until your debt is paid off.
For example, lets say you have five debt payments, a car payment of $200, your student loan at $150, cc #1 at $45, cc #2 at $45, and cc #3 at $40. The balance on the car is $7,500, your student loan is $10,000, cc #1 is $6,500, cc #2 is $4,000, and cc #3 is $2,000. So let’s put those in the order of least to greatest according to the balance owed on them. The first figure is the balance of the loans, the second figure is the minimum payment.
- CC #3 $2,000, payment $40
- CC #2 $4,000, payment $45
- CC #1 $6,500, payment $60
- Car $7,500, payment $200
- Student loan $10,000, payment $150
So there, we have the our debt in the correct order, so let’s say you can pay an extra $100 a month to CC #3. So you pay $140 a month to CC #3 and the minimum payment to the rest of your debt. Once you get CC #3 paid off, mark it off your list and move on to CC #2. Your new payment for CC #2 is $185. We get that by adding the old minimum payment of CC #3 of $140 plus the minimum payment of CC#2 of $45 ($140+45=$185.) So your new minimum payment for CC #2 is $185. So when you get CC #2 paid off, mark it off your list and continue down your list of debt’s. Remember to add the payment you were making to the previous bill to the minimum payment of your next bill. When you start paying on your last bill which is the student loan, do you know how much you will be paying each month? You will be paying $495 every month, now that a far cry from $140 a month you were paying on CC #3 at the beginning.
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