Apr 16, 2013

Budgeting Your Debts Away

As consumers, we are often driven to create debts for ourselves. We have a built in desire for a house which, more often than not requires a mortgage. The same for cars which require loans and other great items that we simply can't pay for right now. When we go to the store, we are often asked if we would like to save 10% on our purchase today by signing up for a store credit card. Our answers, “Well, of course I would!” The simple fact is, our country and economy is based on debt. But, what if we really want to live debt free? Is it even possible? Well, I believe it is and I'll explain how I believe it can be done below!



The Budgeting Debts Away Concept

More often than not, consumers live just within their means. Therefore, the pay check to pay check lifestyle has become a reality for many! But, I believe that it doesn't take a pay raise to change the pay check to pay check habit. If you think about how much money you take in and, how much money you spend each month, you've probably come to the conclusion that it's not possible. But, I'm going to challenge you to think again!

This time, let’s really calculate this out. First, add up all sources of income that you have. This could be salary, side job, alimony and any other source of income that you receive consistently. Now, make a list of all payments you are required to make every month. This should include rent/mortgage, auto loans, credit card payments, utility bills, medical bills and any other bill you get every month. Add up all of the payments required and subtract the total payments from your total income.

Now, we have to think about food. From what's left, subtract the amount of money you spend every month on food. This does not include going out to eat. This amount should only include how much money you spend at the grocery store. Once you've got a new total, subtract the amount of money that you spend on gas for your car every month.

Your Total Is Monthly Leverage

The total that you come up with at this point is leverage that you can use toward your debts. But, how can you take advantage of this leverage and, get the most bangs for your buck? The best way to do this is to come up with a plan that pays off your highest interest rate first. No matter if you have only $50.00 at a high rate or if you have thousands at high rates, paying off the highest interest rate debt that you have first will save you the most money. With that said, to really use the extra funds you have to their fullest potential, you are going to have to do a bit of work. It's time to really start understanding your debts.

To understand your debts, it's best to make a debt portfolio. This is very simple. All it is, is a simple list. Make a list of all your debts in order from the account that charges you the highest rate the the one that charges you the lowest. Make sure to include all information that you can about your debts. Of course, the most important information to include is the lender, interest rate and balance. However, it's also important to include things like account numbers, pay to addresses and available credit.

Once you've created this list, you know that the lender at the top of the list is your target. This is the lender that gets the most out of you. Therefore, you are going to fight back by paying that debt off early and cutting off those high interest payments. Here's how it's done

There Is A Snowballs Chance In Debt!

As a matter of fact, one of the best ways to target the highest interest rate debt and get out of all of your debts quickly is by using the debt snowball! This concept is based on the fact that as you pay off debts, more and more liquid assets become available to you. Assets that can be used to pay off other debts. Under this idea, the total that you spend in payments for debts today is the total amount of money that you should pay until all of your debts are completely paid off. When using the debt snowball concept, you will pay minimum payments to all of your debts. Well, with the exception of one of them! The debt that charges you the highest interest rate should receive all extra funds you are willing to use to pay off your debts. By doing so, you will pay off your highest interest rate faster. That leverage we talked about earlier can be used for this!

And The Snowball Debt Rolls

Once you've paid off your first debt, use the extra money that has now been freed up to pay off your next highest interest rate balance. Now, you have even more money available to send so, you will be able to get this one paid off even faster than the last. Continue the process until all of your debts are paid off and, save tons of money and time when repaying your debts!

About The Author: This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance and avid personal finance journalist. Join the conversation about this article on Google+!

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