How do you pay off debt? Start with a plan.

Even before we made an effort to get debt free, my husband and I always paid our bills.  We never missed a payment, nor were we late.  But we only paid our scheduled monthly amount...no extra.  When we decided to make the conscious effort to PAY OFF our debt, we started with a plan.  Without a plan, it's difficult to stay on track.  Once you have a game plan, it's FUN to pay off your debt.  No, seriously...this CAN be fun!

*  The first step is to go over your budget and determine how much extra money you have a month to use toward your bills.

*  The next step is to identify all of your credit card debt and loans.  For example (purely fictional numbers)...

     Credit Card A - interest rate of 13%, balance=$5000, minimum payment $100/month
     Credit Card B - interest rate of 11%, balance=$7000, minimum payment $130/month
     Car Loan - interest rate of 5.9%, balance=$3,000, monthly payment $200/month
     Student Loan - interest rate of 6.5%, balance=$12,000, monthly payment $400/month


*  The final step is to identify your plan of action, and there are a couple of schools of thought on this.
   
     1)  One theory is that you should pay them off in order of interest rate.  Put them in order; highest interest rate to lowest interest rate.  Pay only the minimum balance on all of your bills except the one with the highest interest rate.  In this example, that would be Credit Card A.  Use the extra money every month and pay it toward the balance on the card.  Once this bill is paid off, use all of the money you were paying toward the first bill and put it toward the next in line.  Repeat.  This plan starts off slowly, but gains momentum as you go.  It also saves you money while you're paying off your bills by eliminating you highest interest rates first so you pay less interest as you get closer to your goal.

     2)  Another theory is to pay off your bills in order of lowest balance to highest balance.  In this example, you'd start with the car loan, put all of your extra money toward that bill every month and pay it off quickly.  Then you put all of the money you paid toward the car loan toward the next lowest balance.  Repeat.  In this scenario, you pay more interest over the long term.  The benefit to doing it this way is that you get quick gratification.  The first debt is paid off more quickly than any other would and it keeps you motivated to continue paying off the rest.


Whatever way you choose, it's important to stick with it.  It may take a while to be debt free, but if you keep chipping away, it will happen.  I'm a little weird...I've always loved paying my bills and seeing the balances drop.  That was enough incentive for me.  The way I got my husband go without extras in order to pay off our bills was a reward system.  Every time we started on a new bill, we agreed on the reward we'd get ourselves for reaching our goal.  Our first reward was a mini kegerator.  Our last reward was my husband's flat screen HDTV.  It kept us both very motivated and turned it into a game. :)

What do you do to motivate yourselves and each other to pay off your debt?