D is for Debt Reduction

From our experience as investment advisors, most people who cannot save any money are in that position because so much of their income goes to paying off debt.

Your budget needs to focus on paying off your consumer installment debt as quickly as possible (think debt with very high interest rates, like credit cards). Paying off other debt, like a home mortgage, can wait for later.

When building your budget, gather the following information about your consumer debt: current balance, minimum payment, and interest rate. Then order your debts by the amount of current balance, lowest to highest.

Let’s assume your lowest current account balance is a credit card debt of $1,000 with interest 19.9%.  Let’s further assume the minimum payment is $36.50—which has you paying off the balance in 36 months at a cost of $314.30 in interest. And one last assumption:  The dollar amount in your budget you have designated for “additional debt payments” is $150.

Pay the minimum payment on all of your debt except the one with the lowest current balance.  Pay the $36.50 plus the $150. Within 6 months, your $186.50 payments will have this $1,000 credit card balance paid in full!  And your interest payments will only total about $56.

Then, what is the installment debt with the lowest credit balance? Let’s say its minimum payment is $62.  Add to this $62 the $186.50 you previously had budgeted to pay off the other debt.  The resulting increased monthly payments of $248.50 will pay off this debt much quicker.  When it’s paid off, add $248.50 to the minimum payment of the third debt on your original debt and pay that off more quickly.  Continue this strategy until you have paid off all your consumer debt.

Once your consumer debt is all paid off, how much extra money do you think you will have in your budget each month? A lot!

Oh, and don’t take on any more installment debt!