Many Americans are drowning in debt. In the fourth quarter of 2020, consumer debt exceeded $14.3 trillion. With a pandemic and economic recession, this financial burden can cause stress, sleepless nights, and heated arguments in the household. So how can average Americans get out from under this weight?  It’s done by sticking to a simple payoff plan.  

The biggest obstacle in paying off debt is dealing with the monthly payments. These recurring costs could include: credit card balances; student loans; medical bills; car notes; payday loans; home equity loans; personal loans; and home mortgage loans. Paying the minimum balance for each debt not only straps your income but can cost you MORE in the long run.  Rather than going that route, debt can be resolved quicker by paying off each debt in order from the smallest balance to the largest balance. 

First Step:  

List your balances from smallest to largest with their minimum payments. Take the example below:  

• Medical Bill 1                    Balance: $150                     Min: $25
• Credit Card 1                    Balance: $350                     Min: $25
• Medical Bill 2                    Balance: $400                     Min: $25
• Credit Card 2                    Balance: $4,560                  Min: $50
• Car Loan                           Balance: $10,780                Min: $350
• Student Loan                    Balance: $22,560                Min: $150  

If you begin with the largest debt, you won’t see results for a long time and might get discouraged. It’s very important to pay your debts in a way that keeps you motivated until you’ve paid them off.

Second Step:    

Pay the minimum monthly payment on all debts EXCEPT the smallest balance.  The smallest balance is where you would pay as much as possible.  In our example, Medical Bill 1’s minimum is $25.  So if you paid the minimum, it would take 6 months to pay off. If you simply double the payment to $50, it will be paid off in 3 months.

Third Step:   

Once the first debt is paid off, take that payment and ADD it to the next debt.  In our example, Credit Card 1’s minimum payment is $25. Take the $50 you allocated to Medical Bill 1 and ADD it to the payment totaling $75 - paying off Credit Card 1 in only 4 months! Now, take that $75 and add it to the minimum in Medical Bill 2.  Since you have been paying the minimum this whole time, your balance is now $225.  Now, you are paying $100 towards the bill.  If you throw a little extra, it’s paid off in 2 months!  

• Medical Bill 1                    Balance: $0                        
• Credit Card 1                    Balance: $0                        
• Medical Bill 2                    Balance: $0                        
• Credit Card 2                    Balance: $4,100                 Min: $50              
• Car Loan                           Balance: $7,700                 Min: $350
• Student Loan                    Balance: $21,200                Min: $150  

So, in 9 short months, you have paid off three debts and taking your first steps to becoming financially independent! Getting quick wins in the beginning will help light a fire for you to pay off your remaining debts! Then just keep the momentum going!

FOURTH STEP:  

Here is where it gets tricky.  Some experts will tell you to close credit card accounts and pay cash for any purchases: clothes, food, gas, etc., and they would be right! Except for one important thing….you NEED credit. It’s unfortunate, but in order to purchase large items such as cars, homes or secure a loan, a person must have established credit in order to have a good credit score. Your credit rating is simply the method many businesses use to figure out if you’re reliable or trustworthy. So, don’t close the credit card account. Cut up the card, hide it, or keep it secure for emergencies, but keep it open. You want to show creditors that you have available credit and restraint.

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