Dumping Credit Cards and Other Debts | Personal finance planning

Posted by admin on May 19, 2012 |
in Personal finance planning

At the time of this writing, the average American has at least two credit cards, and the average American family carries at least $5,000 in credit card debt. To many of us, this has just been accepted as, ?A way of life,? or, ?just the way it has to be.? Some of us, though, go against what is ?normal.? Some of us are ready to say, ?Enough is enough.?

You single greatest wealth-building tool is your income. You are more likely to build substantial wealth by saving and investing your income than you ever will by playing the lottery, saving up rewards points, or playing single stocks. How then, would you utilize your income to build wealth if nearly all of it is owed to someone else each month? Unfortunately, that is how many Americans live. Each month, their entire paycheck comes in, and immediately goes back out to debts.

If you want to utilize your income to its greatest potential, you will have to keep some of it around, and that means dumping debt. A good place to start for most people is usually credit card debts. Credit cards typically carry higher interests rates than, say, student loans or home mortgages, and they are also typically smaller in size than other debts.

To clean up your debts, I support using what is known as the ?Debt Snowball? system. The debt snowball is a system for getting out of debt that was developed by financial advisor Dave Ramsey. It has helped thousands (if not millions) of Americans get out of debt and build wealth.

The way the debt snowball works is backwards in the minds of many financial advisors. That is, rather than taking a mathematical approach to dumping your debt, you take a behavioral approach. The theory behind this is that money management is 20% math and 80% behavior.

Do build your debt snowball, you write down all of your debts in order from smallest to largest, paying no attention to the interest rates. This is the order you will pay off your debts. Now you write down your minimum payment on all of your debts.

The first item in your list (the smallest debt) will be your first focus. All of your other debts will only receive the minimum payment, and any extra money you have will go to the first debt until it is paid off. Once the first debt is paid, you add the entire amount you were paying on that debt to the next debt in line. You will pay off your second debt faster, because you are paying the minimum payment, plus the total payment you were sending in for the first debt. Continue down the list this way until all debts are paid.

Let?s say your debt snowball looks like this:

1. CreditCard A ? - ? - Amount $2,400 ? - ? - Minimum due $25 ? - ? - Payment $200

2. Credit Card B ? - ? - Amount $5,200 ? - ? - Minimum due $80 ? - ? - Payment $80

3. Car Loan ? - ? - Amount $12,900 ? - ? - Minimum due $300 ? - ? - Payment $300

What we have is three debts, paying $175 extra on the first each month until it is paid off. It will take between 13 and 15 months to pay this debt off, depending on the interest rate, and assuming no extra money is sent. Once debt number one is paid in full, we add the $200 payment we were sending to pay it off on to debt number two. To total monthly payment for debt number two will now be $280.

Hopefully now you can see how using this method, you will be able to work through your debts systematically with a proven strategy.

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M. Holland

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