How to Calculate the Best Method to Pay Off Debt
- 1). Calculate the amount of your debt. Gather all of your bills, including personal loans, student loans, credit cards, automobile loans, medical bills, mortgages and taxes. This information is important to know before you begin a debt-elimination program. Write down the balances, APR's, and terms and conditions on each account that you have.
- 2). Cut back on spending. Spend money only on necessities so that you can put the extra money into paying down debt every month. For example, saving an extra $10 per day in the course of a year would amount to $3,600 in additional savings. Consider any alternate ways to save on big items, such as cars, a child's private school and yearly vacation expenses, or you might even consider moving into a smaller house to save on your mortgage. It will be harder to gain control of your finances if you don't monitor your credit card balances and find alternate ways to save money.
- 3). Prioritize your bills. Figure out the order of importance of each bill and apply the extra reserved savings each month to the most important. Create a ranking system by dividing the balance of a credit card by the minimum payment required. Pay the credit card with the lowest number first, and pay the remaining credit cards with the minimum payment required. Remember that by just paying the minimum payment each month, you will be paying off the amount borrowed many times over for years. Credit card companies charge over-the-limit, late and annual fees, in addition to interest rate charges, which make matters worse. The goal is to eliminate the number of credit cards rather than start with the highest interest rate. Never close the account once it's paid off because it will affect the debt to income ratio that determines your credit score. Call credit card companies and ask for lower interest rates, even if you have to make numerous phone calls or speak with a supervisor.
- 4). Create a chart visual, ranking expenses according to importance, for example: 50 percent mortgage, 20 percent utilities, 10 percent transportation and 20 percent everything else. If you see that you are spending too much on eating out, prepare meals at home and take a brown bag lunch to work. Put away credit cards and use cash or a debit/ATM card. Buy items that can be paid off at the end of the month.
- 5). Earn extra money. Start a second job or ask for a raise at your current job. Ask for higher prices for your services rendered whenever you find it appropriate. If children in the household can work, ask them to be more financially responsible and to contribute to the household income. Walk around your house to find household items to sell online, or hold garage sales to increase your income.
