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21 Days to Rock Your Finances: Day 11 -Get Out And Stay Out Of Debt

Today’s post gives you soup to nuts as it relates to getting out of debt!  So if you’re in debt and need a strategy?  Pull up a seat!

Before we get started, it’s important to underscore the importance of this step.  If you’ve been in debt for some time, you’re clearly reading this post because you want to get out, right?  Ok, good!  So let’s not sabotage your efforts by keeping those credit cards available to you.  This is what I need you to do, and you can do one or all, it’s up to you.

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  • Cut up your credit cards and throw them away
  • Put them all in a bag and freeze them. This way when an “important” purchase comes up you will be forced to think about it as the card thaws from the ice
  • Call your bank and tell them to “freeze” the account. This prevents any further charges, especially during the throws of an impulse purchase
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Now when I discuss paying down debt, I usually go to the snowball method which works really well.  But I also realize that we all have different situations and preferences around how we’re planning to pay down debt.

That said, I always refer back to one of my favorite posts by fellow personal finance blogger, NCN-No Credit Needed as he ROCKS this debt reduction strategy post by listing various scenarios that we can use to pay down debt.  Here I will list the strategy and the pros and cons but you can see the full post with deets for yourself:

[titled_box title="Good Debt, Bad Debt" variation="green"]Pros -

  • Allows you to focus on debts with higher interest rates, unsecured debts, etc.
  • Separating debts remove stress of focusing on entire debt balance
  • By not focusing on mortgage debt (or other good debt), you are free to contribute more to retirement and education savings.

Cons -

  • Determining which debts are good debt and which debts are bad debt can be subjective
  • Debt is debt, and no matter the type, it must eventually be repaid
  • By not focusing on certain types of debt, one might be lulled into a false sense of financial security
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[titled_box title="Focus on Multiple Debts" variation="green"]Pros

  • Allows you to focus on multiple accounts, instead of just one
  • The fixed extra payment is included in your monthly budget as a budget item
  • Plan can include or exclude first mortgage
  • As you eliminate accounts, the amount going to the remaining account increases, thus providing a bit of a snowball effect.

Cons -

  • Due to the fact that interest rates are not considered, this isn’t the most mathematically sound method.
  • Lack of focus on one account could be discouraging
  • Does not differentiate between secured and unsecured debt
  • A disproportionate percentage of extra payments will go towards accounts with smaller balances
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[titled_box title="Debt Avalanche" variation="green"]Pros -

  • Mathematically sound
  • Easy to setup, easy to follow
  • Plan can include or exclude first mortgage
  • Minimizes amount paid in interest

Cons -

  • Having a large balance on top of your list can be discouraging
  • Focusing primarily on one debt at a time could be discouraging
  • Does not differentiate between secured and unsecured debt
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[titled_box title="Debt Snowball" variation="green"]Pros -

  • Paying off entire accounts, quickly, is emotionally satisfying
  • Easy to setup, easy to follow
  • Plan can include or exclude first mortgage
  • Quickly eliminates smaller account balances

Cons -

  • In most cases, isn’t the most mathematically sound method
  • Focusing primarily on one debt at a time could be discouraging
  • Does not differentiate between secured and unsecured debt
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[titled_box title="Focus On Specific Debt" variation="green"]Pros-

  • Shifts focus to account at the top of your list, perhaps debt owed to the IRS or a personal loan owed to a friend
  • The personal nature of this method may motivate you more than any other method
  • Provides a sense of control over financial situation

Cons -

  • This may not be the most mathematically sound method
  • Easy to get off track after worrisome debt has been paid-in-full, due to lack of continued focus
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Pick one of the above-mentioned methods to get out of debt, see what works for you and stick with it!  Adjust your course when things aren’t working out but make sure that you stick with the action plan to pay down all of your debt!

Next Steps:  Stay Out Of Debt!

Whether you choose to do this before or after you pay down debt, save 1-3 months of expenses.  This helps you stay out of debt because you’re no longer tempted to use credit in dire situations as you will have a mini emergency fund to fall back on when things get critical.

 

If you’re new or just joining us, you can recap here:

  • http://www.themoneyprinciple.co.uk/ John@moneyprinciple

    Remember that money is just somewhere for you to store your labour.  So debt is expected labour – work that you believe will arrive.  When the debt/labour exceeds reasonable expectation, there is problem. 

    The first mortgage on your house is just like rent.  These days you have to ignore any property appreciation (hoping for no further depreciation) and of course you need to add to the mortgage an allowance for repairs and maintenance.  The only question is do you really need that big house/mortgage?

    • http://www.girlsjustwannahaveufunds.com/ Ginger-GirlsJustWannaHaveFunds

      Nope, and that’s why I will probably never buy another home as I think the related costs outweigh the potential benefit.  I would rather rent a smaller home and save money that way.