4.19 Trillion is a lot of money! How many zeros is that?
According to the Federal Reserve it is the total debt of all US residents. That works out to be $12,748 per person, regardless of age! We are a country that loves to get what we want, when we want it, and because of it, we are a nation stuck in debt.
Understanding the different kinds of debt will help you choose the right system to get debt free.
2 Main Types of Debt
Debt is divided into secured and unsecured. Secured debt is tied to something of value. When you take out a loan on a car or house it is tied to or secured against that specific asset.
These types of loans are considered less risky and usually carry lower interest rates than unsecured debt.
Debt that is not tied to an asset is unsecured. Since there is no collateral, there isn’t anything for a lender to go after if they aren’t paid. The lack of collateral on credit cards and personal loans makes them riskier to a bank, which equates to higher interest rates for the borrower.
How Do You Eliminate Debt?
The reason most people have debt is because they spend more money than they have or make. Before you can start reducing debt, you need to stop creating more.
The first thing you should do is create a budget. Next, make a list of all the non-mortgage debts that you have. Beside each debt list out the Creditor’s Name, Phone Number, Minimum Payment, Balance, and Interest Rate.
Now that you have all the details, call each creditor to see if they can reduce your interest rate. Sometimes simply calling and asking for a lower rate will help you save money on interest payments, starting you on the path to getting debt free. If they agree to reduce your rate be sure you update your debt list accordingly.
System 1: Debt Snowball
This system to get debt free starts with listing out your debts in order of the smallest balance to the largest. Focus on eliminating the debt with the lowest balance first while making the minimum payments on all the others.
Here is an example of a debt snowball:
Once the first debt is paid off, move to the next one on the list. Take the payments you were making on the first debt and combine it with the minimum payments on the next one. This is the amount you will send the next creditor until they are paid. Continue this process until the last creditor on your list has been satisfied, making you totally (non-mortgage) debt-free!
The beauty of this technique is that it allows you to have some quick wins and gain momentum.
Once the snowball starts rolling down the hill it gets bigger, just like your payments. The larger payments will be used to tackle your debts with the larger balances, until they are all gone.
Be sure to take a moment to celebrate each debt as you destroy it!
System 2: Debt Avalanche
The debt avalanche system to get debt free is similar to the snowball with one difference, sort the debts by interest rate instead of balance. List your debts with the highest interest rate first in descending order to the lowest. This technique focuses on your highest interest rate debt first and then moves down the list just like the debt snowball.
Here is what the debt avalanche looks like:
The debt avalanche is my favorite technique. I am very analytical (in case you haven’t noticed!) and this option saves you more money than the debt snowball. It gets rid of the biggest drains on your money first, the highest interest rate debt.
More Debt Reducing Tips
Following either the Debt Snowball or Debt Avalanche system will get you debt free. However, there are some additional options you may want or need to consider:
- Automate payments to each of your creditors
- Cut up and throw away your credit cards
- Delete saved credit card information on sites like Amazon and Walmart
- Consider a credit card balance transfer at a lower rate
Debt is the largest obstacle you will face on your financial journey. It’s large interest rates hold you back from progressing towards your goals.
The typical interest rate on a credit card is over 16% according to Creditcards.com, while the typical rate of return on the stock market is just 8%. No wonder most people can’t get out of debt, they borrow money at a rate double that of what they earn!
There is no right or wrong option to select when working to get debt free. The important thing is that you start and stay focused. Which system works best for you? Comment below.
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