Debt Payoff Formula

Debt Can Be Paid Using Different Formulas

Many will tell you the fastest way to eliminate debt is to send additional money to each card.

Some will say, pay the one with the highest interest rate.

Some will say pay the one with the smallest amount owed.

There are many ways to do it.

Why is a plan so important?

Depending on how much you owe, what interest rate you are being charged, how much the company is asking you to pay as a monthly payment, how much you are going to use towards paying your debt each month – will determine what order you should pay your debts.

A person that will put $100 a month towards paying off their debt will be told a certain order to pay off their debt. If this same person can pay $200 towards debts, a lot of times the order of payoff will change.

Why?

Some cards, loans are asking you to pay enough monthly (and because of the interest rate they are charging), they are actually accelerating your payoff compared to another debt.

I know you didn’t know it was that detailed to matter. Yes it is that detailed!!!

If you don’t have software that can tell you the fastest way, all you need to do is line your cards up and place your mortgage at the bottom of the debt. If you have debt that are not charging you interest or if you accelerate it, it is not going to save you any money – those go just above the mortgage.

Line up your cards: the one that has the lowest balance to the one with the highest balance. Do not send additional money to anyone except the company on top of the list. Everyone else gets the minimum payment.

Example:

Card 1: owe $500
charging interest
asking for $50 a month payment
Card 2: owe $200
charging interest
asking for $25 a month payment
Card 3: owe $1200
charging interest
asking for $65 a month payment
Card 4 owe $100
no interest
asking for $10 a month payment

Most will tell you to pay the $100 because it is the smallest.

Why I say you shouldn’t?

It is not going to save you any money by paying it off faster. There is no interest or the loan/card is at a point where acceleration is not going to save you any money. You want to eliminate the people that are charging you.

Think about it. If you pay $50 (card 1 above) and $30 is interest, you are only paying $20 on your debt. Most don’t understand how long it takes to pay off a card if you pay the minimums.

So in the example above, I would pay in the order you see (except switch cards 1 and 2).

It will look like this:

Card 1: owe $200
charging interest
asking for $25 a month payment
Card 2: owe $500
charging interest
asking for $50 a month payment
Card 3: owe $1200
charging interest
asking for $65 a month payment
Card 4 owe $100
no interest
asking for $10 a month payment

Pay off the $200 first. Once it is paid, you take the money you were using ($25) and go after card 2. So your new payment on card 2 would be $50 (original monthly) + $25 (old payment on card 1) = $75 until card 2 is paid off. You continue these steps until you are out of debt.

Tip: Again only the person on top gets additional money. Minimum payment goes to everyone else

Note: Once cards are paid off, use the monthly payments to accelerate your mortgage.

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