Friday, September 28, 2012

Financial Freedom

If there is one thing I know all too much about, it's the crushing power of debt. My husband and I started our marriage with a little student debt, which continued to grow through the first few years of marriage. We managed to add a significant amount of consumer debt on top of it.

Every time we've managed to make a dent, we fall back into old habits. It's not a pretty sight and it's a very frustrating situation that we've put ourselves in. But, through several roads we've taken, we've learned a few things about debt that I believe are vital to controlling it.

Cut up your credit cards: Don't just freeze them. We tried that, but it's all too easy to defrost that hunk of ice when you want to spend money you don't have. Chop them up and get rid of them forever. If you can't stop spending money on the cards, give them the old boot.

Yes, you need a credit card to rent a car (you can use a debit card but it's a huge hassle) or to purchase plane tickets. However, if you have as much debt as I think you do, you shouldn't be planning very many trips in the first place. If you must, keep ONE card for emergencies only and put it somewhere that is not easily accessible.

Stop spending: Duh, right? Really though, stop spending on credit. Quit buying things with money you don't have. If you can't afford it, you don't get it. The end.

Debt stack: This is possibly the MOST important thing I can ever teach you about getting out of debt. This is a 100 percent guaranteed way to pay off debt quicker.

The trick works this way: Lets pretend you have three credit cards you need to pay off. Credit Card A has a balance of $2000, with a minimum payment of $45 a month and a 25 percent interest rate. Credit Card B has a balance of $3,000 with a minimum payment of $65 and an interest rate of 22 percent. Credit card three has a balance of $5,000 with a minimum payment of $100 and an interest rate of 19.5 percent.

You choose one card (typically the card with either the lowest debt of the highest interest rate) and you pay an extra amount per month. Let says you can afford an additional $50 on top of the minimum payment. So, instead of paying $45 a month on credit card A you start paying $95 (minimum payment plus extra $50). You continue making minimum payments on the other two cards and sack any extra money you have towards paying off card A.

After you have paid off this first card you'll have an extra $95 a month free. Instead of using this extra cash to spend on things add it to the amount you are paying on credit card B. So instead of paying $65 you are paying $150 per month (minimum payment plus what you were already paying to the other credit card you just paid off.)

When you are finished with credit card B you'll now have $250 per month you can dedicate to paying off your last card (minimum payment for credit card B plus what you were paying for the previously paid off cards.)

You'll save months, if not years, plus thousands of dollars in interest by approaching debt this way. It will require sacrifice and discipline but it will work. You'll save money and get your debt paid off much quicker than just paying minimum payments on each card.

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