The easiest way to get out of debt is the easiest way to do almost anything: PLAN.

Debt gets out of control because we don't have a plan to pay it off.

So, I propose these things:

  • Create a separate "debt repayment" bank account used solely for paying your debts.
  • Make a calculation: How much do I owe, what's the average interest rate of all my debt, and over what period of time would I like to pay it all off? Suppose you owe $400,000 including your mortgage. You write down how much each of your debts are and at what interest rate you're repaying the loan. Multiply your outstanding balance of each account by the annual interest rate to arrive at how much interest you pay per year on the account. Total all of your debts and divide by the total yearly interest you pay on all of your accounts to arrive at an "average interest rate." Now, suppose you'd like to be totally out of debt in 10 years. Using a mortgage calculator, enter 10 years, your average interest rate percentage and your total debt. Ask the calculator what you would have to pay every month in order to amortize or pay off all of your loans in 10 years. That's the amount you put in your debt repayment bank account plus an extra $200 per month for emergencies.
  • EXAMPLE: $400,000 of debt at an average interest rate of 8% per year, and you want to pay it all off in 10 years. According to my formula, you would have to contribute $4,853 + a $200 margin = $5,053 per month contribution to your debt repayment account (make sure this bank account pays you interest).

Is $5,053 per month more that you can afford? Pay it off over 20 years instead and your monthly contribution would be about $3,546 per month. The faster you can pay your debts off, the more money you'll save.

It doesn't really matter how long of a repayment period you choose, as long as you promise yourself you'll never remove money from your debt repayment account unless you pay a debt or have an absolute emergency.

So, when a bill comes through, pay it from your repayment account. Money will start to accumulate in your account over time. You may use any extra money to make larger payments toward the debt that has the highest interest rate. When that one is paid off, then you can make even larger payments to the accounts that cost you the most, and so on.

When you get your paycheck, pay your debt repayment account FIRST and make sure you live off of the rest. And don't buy anything big or that you really don't need during the debt repayment period unless you have money leftover after you pay towards your debt repayment bank account.

If putting money in your debt repayment account causes you to live "lean," just remember what life will be like for you debt free. You can then have more options including paying for new things, vacations and home improvements with all cash, no debt.

Do you want to free yourself from debt? Are you willing to make the tough decision to do something about it? Maybe you'll follow through on my idea.

My best wishes to you.

David Jurewicz, REALTOR(r), 00661096, RE/MAX Gold, 916.682.6454