How Do You Get Out of Debt Fast

budgetsmallDebt sucks! There’s nothing fun about opening your credit card bills every month and seeing the growing balance.

Consumer debt such as credit cards, car loans, and often second mortgages or HELOCs,  can be more stressful than any other money related issues. When you’re ready to get serious about paying off those credit cards, here is a 5 Step System to Crushing your Credit Card Debt — fast.

Step 1) Inventory consumer debt

Take inventory of all consumer debt. This includes bank and store cards, lines of credit and home equity or second mortgages that were used to buy consumer goods or pay off credit cards.

Make a list including:

  • Each credit card
  • The balance
  • Minimum monthly payments

Add up all the total debt and total the monthly minimum payments.

Step 2) Evaluate causes of debt

Time for a bit of honesty and ask yourself why you made those purchases to begin with. We usually go into debt is to overcome some unhappiness and use debt to live a life we really can’t afford.

Rarely does consumer debt come from catastrophic expenses like medical bills. Instead, debt usually accumulates because we spend too much trying to be happy instead of planning for emergencies with insurance and savings.

What have you bought on credit: vacations, cars, eating out, etc. All of those are luxuries, including the car. Do you really need the car you drive or could you have gotten by with something less expensive?

Here is the most important question: Ask yourself, does the amount you’re forced to pay to your credit cards makes you more or less happy than the original unhappiness you were trying to overcome when you bought all of that stuff to begin with.

That’s an intense question. More often than not, the burden of debt payments causes more stress than the short‐term happiness you gain from what you bought.

For more motivation, take your total monthly minimum credit card payments and ask yourself what else you could be doing with that money.

For example, imagine instead of paying your credit cards you hire a housekeeper and never have to clean your house again. What if you saved a little each month to go on an amazing vacation, worked fewer hours, or spent more time with your kids.

Usually when it’s laid out like this, it’s easy to agree the material objects or restaurant meals you bought weren’t worth the monthly payments you’re paying for an eternity.

Step 3) Set the date

The prior step is intentionally painful to motivate you to dig deep and get those things paid off. You’ll need a burning desire to pay off credit card debt because it’s hard to do. Step 2 provides the motivation, and then setting a rigid date is the only way it will really happen.

A goal without a plan is just a wish,” so to make your wish of paying off your credit cards come true, you need a clearly defined plan, and that means a deadline.

Take the figures from step 1, along with the average interest rate, and plug them into a debt calculator. Play around with the numbers to figure out how soon you can be debt‐free at various sized monthly payments. Pick a monthly payment you can afford, set a date, and stick to it.

Step 4) Prioritize the payoffs

The next step is what will keep you motivated.

Despite what the debt calculator says, you can ignore the credit card interest rates. Emotionally, it’s best to take the card with the smallest balance and focus on it first. Make the minimum payments to each card except the one with the smallest balance. Pay your remaining money toward the card with the smallest balance.

Attack the card with the smallest balance with everything you’ve got until the balance is wiped out. But don’t stop there, when you get extra money like a bonus at work use it to pay down that card. If you can sell some junk in a garage sale, send money to that card too.

Quickly, your smallest credit card will have a zero and then you can shift all that money to the next smallest balance. This system works at an emotional level. Each time you pay off a credit card it’s a small victory and inspires you to keep moving forward. Each time you pay off a card, you free up more money to go to the next card.

Celebrate each time you knock one down. Here is an example of four credit cards.

Card A: $3,200 balance, 19% interest, minimum $128
Card B: $7,000 balance, 5.5% interest, minimum $280
Card C: $2,200 balance, 10% interest, minimum $88
Card D: $9,100 balance, 12% interest, minimum $364

Mathematically it makes sense to attack credit card ‘A’ first because of the higher interest rate, however, paying off credit cards is an emotional battle. In this example, if using a debt calculator you determined you can pay off all your debt in a reasonable amount of time with a $1,200 monthly payment. Set automatic monthly minimum payments to cards A, B, and D and set an automatic payment to ‘C’ for the remainder of the $1,200.

That puts things on auto pilot, but you still need to aggressively attack card ‘C’ with any extra cash you get. Quickly, credit card ‘C’ will be paid off. Then divert all your effort to card ‘A.’ This works very well because you will see progress fast.

Step 5) Commitment

The final step is to commit to your plan with absolutely no exceptions. No wiggle room. Set a date and stick to it no matter what.

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This post was adapted from How to be Rich: The Couple’s Guide to a Rich Life Without Worrying About Money which is available at Amazon.com

Share your plan below and let me know how it’s going. That may be just the added pressure need.

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25 Replies to “How Do You Get Out of Debt Fast”

  1. hi chuck

    why dont we set automatic payment into credit card A, D, C, then B as it has the lowest interest rates.

    i thought thats what i learnt in the CFP course.

    looking for your advice.

    regards.
    ibnu

    1. Hi Ibnu,

      Thanks for the question.

      Quoted from above: “Mathematically it makes sense to attack credit card ‘A’ first because of the higher interest rate, however, paying off credit cards is an emotional battle. In this example, if using a debt calculator you determined you can pay off all your debt in a reasonable amount of time with a $1,200 monthly payment. Set automatic monthly minimum payments to cards A, B, and D and set an automatic payment to ‘C’ for the remainder of the $1,200.”

      With this approach, you pay as much as possible to card C because it has the lowest balance and emotionally, you will get a ‘victory’ faster, and thus stay motivated longer.

  2. i think that we must have a control with our attitude especially in shopping or expenditure. so, try to life simple. :p
    nice info bro. 🙂

  3. That is so true when we try to make ourselves happy, we get into too much trouble at the end. We should always think twice especially when it comes to money. Thanks for the great advice!

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