The members of the Money Blog Network (myself included) are writing posts about year-end money moves and I thought that it would be appropriate for me to write a post about a subject near and dear to my own heart – debt reduction. While preparing to write the post, I was reading through the No Credit Needed archives, and I came across this post from December of 2005. Here’s an excerpt.
I put another 200 dollars towards debt re-payment. (I received some cash as a gift Sunday!)
I then grabbed my old checkbook register and looked up that $200 dollar deposit. The $200 was an unexpected Christmas gift I received from a friend – and I used every dollar of it for debt reduction.
Getting out of debt requires two things – dollar bills and determination.Â
Instead of rewarding yourself with a new purse or a new television, determine to direct those dollar bills towards debt reduction.
(If you don’t have a mini-emergency fund, consider using any year-end bonuses or cash gifts to establish said fund. I suggest a mini-emergency fund of $800 – $2000, depending on the size of your family. After establishing your mini-emergency fund, begin aggressively reducing debt.)
There are several methods for reducing debt, including:
Make minimum payments on all accounts and aggressively repay the account with the LOWEST BALANCE.
Make minimum payments on all accounts and aggressively repay the account with the HIGHEST INTEREST.
Make minimum payments on all accounts and aggressively repay a group of accounts (all credit cards, all student loans), spreading out extra payments among all accounts in a specific group.
Each method has its pros and cons. I chose method 1, focusing on the account with the LOWEST BALANCE.
After selecting a debt reduction method, get a jump-start by using any year-end bonuses or cash gifts and begin to attack your debts.
If you receive a cash gift – Deposit the cash in your checking account and send a check to the next creditor on your debt reduction list.
If you receive a year-end bonus – Deposit the bonus in your checking account and send a check to the next creditor on your debt reduction list.
If you receive a gift that you do not need (or want) – Return the gift for cash or store credit. If you receive cash, deposit that cash in your checking account and send a check to the next creditor on your debt reduction list. If you receive store credit, assign that credit to a particular budget category. (Let’s assume you receive a credit for $50 from Wal-Mart. Assign the$50 credit to your “grocery” category. Send a check for $50 (the amount now covered by the store credit) to the next creditor on your debt reduction list.)
If you receive a gift that you cannot return (and do not need or want) – Consider selling the gift. If you do sell the gift, deposit the proceeds from the sale and send a check to the next creditor on your debt reduction list.
My wife and I spent two years living on a very, very strict budget. We made the decision that we were going to get out of debt – and we did. For us, we treated every dollar, every extra, as an opportunity to reduce our debt and reach our goal.
Were there times when we struggled to stay on-plan? Were there times when we spent more than we had budgeted for? Were there times when we got frustrated and just blew it? Yes, yes, and yes. But, we regathered ourselves and we moved forward. Why? We were determined.
Instead of waiting for 2008 to begin your debt reduction go ahead an attack your debts, now!
Psychologically, method one has proven to work the best. Some people are very driven and can pay off the highest interest debt first, but most people need to see some victories to get the pumped up about reducing the debt. I also chose method one and have enjoyed debt freedom for two years now.
Great article. Most people are going to waste bonuses and holiday money on “stuff” and vacations.
PUT IT TO GOOD USE BY PAYING OFF DEBT INSTEAD!!!!!
Great ideas for the end of the year.
We are paying off the final $44,000 of our mortgage in January. This is the culmination of a lot of years of working on debt reduction. I have been fortunate enough these past four years to use two thirds of my paychecks to pay down the mortgage and for savings. Yipee!
Great idea! All too often we put our money into fictitious buckets. We assume that if it is a gift, it should be used on a “gift item” rather than paying down debt. Money is money, pay off that debt!
Our last day we used a credit card was November 10, 2007. I’ve been reading your blog (and other PF’er) religiously since. Since that date, we have saved $700 in our Emergency Fund. Prior to this plan, and deciding to get out of debt, we had NO savings, we couldn’t figure out where there was EXTRA money in our budget to save. Now, we pay ourselves first and other categories take the hit, like eating out and “stuff for the house”. I looked at our ING account the other day and was shocked how much we could save in this short period of time with not much effort, just by paying ourselves first. AMAZING. When our EF is at $1000 (no kids), we’re tackling the debt (smallest one first, need the psychological boost). Anyways, thanks, your blog means the world to me.
Even though I’ve only been there a month, I got a $50 bonus from my job. It made me really happy! (esp since this isn’t a full-time position).
Even though I’ve only been there a month, I got a $50 bonus from my job. It made me really happy! (esp since this isn’t a full-time position).
And it’s going to the car payment!
Good plan. With savings rates dropping, it’s time to pay down what’s remaining of my student loan. The time has come. :>
I hope I’ll get a year-end bonus too. We’re all gonna be very happy.
A great resource for getting out of debt is http://shopyourdebtaway.com
My transitioning your spending on everyday items like shampoo and toothpaste to our site, a portion of every dollar spent is returned as a rebate check directly to your credit cards, mortgage, auto loan, or other debt as additional principal.
The smallest purchases added up to save years off your loans.