Becoming wealthy is all about your personal finances. Making sure your personal finances are in shape can mean the difference between living pay check to pay check and sipping margaritas on your private beach. The formula to become wealthy is a simple mathematical equation, Income minus Expenses. Earn more than you spend. It works every time. Guaranteed. How fast you start rolling in the dough depends on how big the difference is between your income and expenses. There are two ways to make the formula work quicker for you. Number one: increase your income, which is covered in some of my other posts. Or two: decrease your expenses. One of the biggest expenses most people have is the amount of interest they pay each month to their credit cards and loans.
There are various simple plans. Most of them boil down to paying more than the minimum payment due each month. Here is a list of several ways, use one or use them all. The first step for all of these is STOP using your credit cards.
The simple way (above) is just that - simple, you will pay down your debts eventually but will likely be slow and you probably won't stick to it when your bonus or tax refund arrives. You'll say “I'll just spend part of it then the rest to my credit card”. The problem is human nature: in your mind, you will have spent your tax refund three times over. You get a $1,000 refund, but you've already purchased $3,000 of stuff in your head. However, there is an answer. Actually, there are two. The debt snowball and the debt avalanche.
The Debt Avalanche is the same as the debt snowball except for this time you pay off the credit card with the highest interest rate first. This is the most efficient way to pay down your debt. You pay the least amount of interest this way, but you may not get the early wins like you do when you pay off a credit card in the debt snowball method. This is the method I used because I'm a geek and hated to pay more interest than I had too.
|Credit Card 1||$1,000||9%||$50|
|Credit Card 2||$4,000||18%||$125|
|Debt Snowball||Debt Avalanche|
|Credit Card 1||Credit Card 2|
|Credit Card 2||Credit Card 1|
|Car Loan||Car Loan|
Using our example debts and $100 extra to pay each month.
We would pay $150 ($50 min payment + $100 extra) each month to Credit Card 1 (smallest amount to pay off). When Credit Card 1 is paid off we would take the $150 we have been paying and add it to the minimum payment for our next smallest debt, Credit Card 2. So now we have $275 a month to pay down credit card 2. Once Credit Card 2 is paid off we add the $275 to our last debt, the Car Loan. We are now paying $625 per month on our Car Loan.
We would pay $225 ($125 min payment + $100 extra) each month to Credit Card 2 (highest interest rate). When Credit Card 2 is paid off we take the $225 we have been paying and add it to the minimum payment for our next debt, Credit Card 1. So now we have $275 a month to pay down Credit Card 1. Once Credit Card 1 is paid off we add the $275 to our last debt, the Car Loan. We are now paying $625 per month on our Car Loan.
It's amazing to watch your debts decrease so fast. I used the Debt Avalanche personally when I was paying off my debts. I can tell you that it works and after you have cleared down a couple of your debts it starts working quickly. You and enter your debts, extra payments, and select which method you want to use. It will calculate the amount to pay on each debt and show you when each debt is paid off. I hope it comes in handy.
I know how scary it can be to be deep in debt and wondering if you can ever escape. I'm here to tell you that you can because I did it myself. I've gone from living pay check to pay check, hundreds of thousands of dollars in debt, to having cash in the bank, stocks, no debt and able to stop working for 6 months for a mini-retirement. If I can do it, then you can too.