Runaway debt can drown your hopes and dreams in a sea of red. Paying off credit card bills — for things you may no longer even own — robs you of the seed money you need to invest and become financially independent.
If you are frustrated, remember that it doesn’t have to be that way. Here are three steps that can help you climb out of the debt hole — even if you owe $10,000 or more.
Step 1: Get it in writing
You can use an Excel spreadsheet or simple pen and paper. Heck, use a glitter marker for all we care.
However you do it, write down each debt that you owe along with its minimum payment and interest rate. If you have a credit card with a promotional rate or a mortgage with an adjustable rate, make a note of when those rates will change.
Your list should include all of the following, if you have them:
- Credit cards
- Home equity loans
- Vehicle loans
- Student loans
- Personal loans
- Loans from family members
- Payment plans for the doctor, veterinarian, mechanic, etc.
- 401(k) loans
Once you have all the debts written down, total them up. Now, it’s time to bring that number down to zero.
Step 2: Choose a ‘debt destroyer’ plan
This is much easier than it sounds. While you can use calculators and spreadsheets, there’s no reason to get that involved.
You can instantly create a debt repayment plan by going back through the list you created in Step 1 and numbering the debts in the order you would like them gone.
There are two methods when it comes to ordering debts.
- Debt Destroyer No. 1: Order the debts by interest rate. Start with the debt that has the highest interest rate and work your way down. Note: This method may save you the most money overall.
- Debt Destroyer No. 2. Order the debts by their balance. Start with the debt that has the smallest balance and work your way down. Note: This method may help you see progress more quickly so you stay motivated.
Choose whichever of these two methods appeals most to you.
Step 3: Use ‘pyramiding’ to put your plan into action
Now, you need to put your plan into action. This involves something we call “pyramiding.”
Essentially, it’s about focusing all your money on one debt and then building upon minimum payments as you knock out balances one by one.
Your approach here will differ, depending on which “debt destroyer” method you’ve chosen.
- Debt Destroyer No. 1: Continue to pay the minimums on all your balances. Then, focus on the balance with the highest interest rate and apply all extra money to paying down that debt.
- Debt Destroyer No. 2: Again, continue to pay the minimums on all your balances. Then, focus on the smallest balance and apply all extra money to paying down that debt.
Keep repeating this process each month until you pay off a balance in full. At that point, take all the money you used to spend on that balance and apply it to the next balance on your list.
An example of how it works
For example, let’s say all your debt is on three credit cards. Each has a $25 minimum payment, but you’ve been paying an extra $75 a month on each one, for a total of $100 per card.
- Card A: $25 minimum payment, plus $75
- Card B: $25 minimum payment, plus $75
- Card C: $25 minimum payment, plus $75
Now, let’s say you want to pay off Card A — either because it has the highest interest rate (Debt Destroyer No. 1) or has the smallest balance (Debt Destroyer No. 2).
To start your pyramid, limit payments on Card B and Card C to $25 — the minimum — and take the remaining $150 you previously applied to those debts ($75 on Card B, $75 on Card C) and add it to the $75 extra you already are applying to Card A.
This means you now are applying $250 to the debt on Card A, and $25 each to the debts on Card B and Card C:
- Card A: $25 minimum payment, plus $225
- Card B: $25 minimum payment
- Card C: $25 minimum payment
Repeat this process every month. When Card A is paid off, take the $250 you previously spent on that balance and move it to Card B. This means you now are applying $275 each month to Card B and $25 to Card C.
- Card B: $25 minimum payment, plus $250
- Card C: $25 minimum payment
Once you pay off Card B, move all the money you were paying on Card B to Card C, and keep making that payment until you are debt-free.
The best way to make your pyramid grow
The real benefit of pyramiding is psychological. It gives you a game plan to follow and helps you see results more quickly.
Rather than spending years paying small amounts without any apparent significant progress, you’re heaping all your money on a single debt and watching it disappear.
The secret to making this system work is to look for any and all extra cash you can redirect to your debt. Add a couple hundred dollars to your payments each month, and you will zoom through your debt repayment plan in no time.
Reaching the $10,000 mark
You may be looking at the headline of this article and thinking there’s no way you could possibly pay off $10,000 in debt over the course of a year.
True, if you live on a $20,000 income, you’re probably not going to be able to pay off $10,000 without breaking a sweat. However, for many middle-class families, it’s probably doable.
Let’s look at the numbers.
To pay off $10,000 in debt in a year, you need to pay off about $833 a month, and you’re probably already paying a big chunk of that.
Some of that money is going to interest, but you’re paying down the principal as well. Pull up your account statements to learn exactly how much of your monthly payment goes to the principal and how much goes to interest.
Then, subtract the total of your current monthly principal payments from $833. For example, if you’re currently paying $333 toward principal each month, you will need to come up with an extra $500 each month to reach about $10,000 over a year.
There are a number of ways you could do that. You could:
You can even try one of these 107 ways to make extra money.
If you just can’t get a handle on your spending, try a budgeting app, such as You Need a Budget.
If you need more assistance, stop by our Solutions Center and look for help with your:
Between saving money and earning money, there are plenty of ways to come up with an extra $500 a month to put toward your debt pyramid and hit a $10,000 payoff over the course of a year.
And remember, you don’t have to wait until Jan. 1 to start. Pick any month — like this month — and run the calendar out over one year.
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