Monday, 1 Aug 2011
About the Author: Jeffry Evans is a leader in personal finance and real estate marketing, and has a focus on helping people make and save more money.
First of all, owing money is kind of like dragging around a ball and chain. It is constantly keeping you imprisoned, and holding you back from what you truly want to do. So how do you get debt free in the shortest amount of time?
Option 1: Save as much as you can each month, and divide that up evenly across your debts.
So in this example, you do a really good job of being frugal, and saving extra money each month. You are excited, and you tackle your 2 outstanding debts. You’ve managed to save $500 per month that you can use to pay off your debts. Your first debt is a Visa credit card, which you owe $3,000 on with a 14% interest rate. Your second debt is Macy’s card that you owe $2,000 on at 19.99% interest.
So you divide the payment equally, and put $250 on each card each month. If you work through the math, you’ll have the Macy’s card paid off in about 9 months, and after it’s paid off, if you put all of the $500 towards the Visa card, you finish paying it off about 2 months later. That’s a total of about 11 months to pay off your debt. Not bad.
Option 2: Put all of the money towards paying of the highest interest rate credit card first.
Let’s take the same scenario. In this case, you will make the minimum payment to the Visa card, and take the remaining money and put it all on the Macy’s card. Minimum payments are generally about 2% of the balance, so that means you’ll pay $60 per month to the Visa card, and $440 per month to the Macy’s card.
In this case, when you work through the math, you’ll have paid off the Macy’s card in about 5 months. After it’s paid off, if you put all of the $500 towards paying off the Visa card, you’ll have it paid in about 4 months, for a total of about 9 months to be debt free.
Now think about that for just a minute. With option 1, you are paying $500 per month for 11 months to get your debt paid off. With option 2, you are paying the same $500 per month, but it only takes 9 months to get debt free. That means you save about 2 months and $1,000 using option 2.
Isn’t that incredible?
And you did it all without spending one extra dime. That’s the power of interest, and how you can use it to your advantage.
So let me urge you, if you have debts, and you want to pay them off in the fastest and least expensive way, focus on the highest interest rate debt you have, pay it off completely while making minimum payments on your other debts, then pay off the next highest interest rate debt, and so on. If you do it this way, I guarantee you will be debt free in less time, and have more money in your pocket.