Article 129 Financial Tune-Up - Part 7 Debt Reduction Plan

Debt reduction plans are devised to help with the not-so-simple process of getting out of debt.  It is time we get down to the business of clearing up our debt which task we are going to make easier.  What you need is a fifty-cent notebook to write down what needs to be written so that things will get clear as we go through this journey.

You may have listed them down before but since we did that one sometime ago, our debt may have gone down so list down the names of the creditors in the first column, and the amount of debt on the second column, the rate of the interest in the next and the amount to pay each month. 

Taking stock of the debts is really the first thing to do.  Don’t let anyone else convince you otherwise.  Make a list of all the debts in descending order either according to the amount owed or the interest rate it cost you.  Just change the figures according to your own debts.  Then it will be clearer which one to attack first.  Here's a sample:

Debts in Descending Order

Creditor	Amount Owed	Interest	Payment
Visa	$5000	22%	$200
Store	$4500	18%	$180
Gas	$2000	15%	$100
Dad	$8000	0%

Step 1:  Write down the names of the creditors.

Step 2:  Write down the amount owed to each of the creditors.

Step 3:  Write down the interest rate for each debt.

Step 4:  Write down the monthly payment for each debt.  It is important to keep up with the monthly payment in order not to hurt the credit score.  But you know it is more important to increase the monthly payment if the goal is to get out of debt. 

Step 5. Write down the money available from your budget worksheet that we worked on in this budget worksheet link If you find you are short with the money that is available from your budget worksheet to cover all the monthly payments, you have two choices. One is to lower your cost or find hidden savings in the budget. The other option is to get a second job.

Let us look at the first one which is to lower the monthly cost by finding hidden savings in the budget spreadsheet.  In the aforementioned website where the budget spreadsheet link is, there are links to show how you can find hidden savings from your budget spreadsheet on the following categories: Transportation costs, restaurants, cell phones, cable bills, bank fees and property taxes and electricity.  Go ahead and look them up.

I bet you found more money to at least cover all the monthly payments and some.  If you have something extra, pay more in monthly payment in either of two choices; it’s your call.  There are two choices in this regard.  One is to pay off the one that has the highest interest rate and the other is to pay off the smallest debt.  Both have something good about them so you just make your choice. 

Step 6.  Add extra payment to one of the debts in your list.  Which do you pay off first?  As I said there are two schools on this.  Some say it’s good to pay off the smallest debt regardless of the interest as you will be able to pay off this more quickly than the others and thus might make you keep motivated in paying off your debt.

The second school of thought says you should pay off the one that is garnering more interest for obvious reason so pick the one that works for you the best.  Do whichever is the most important to you.  If the larger debt is giving you the most trouble, by all means, start paying off that one.

Step 7:  It does not matter much which of the two options you go, that is, whether you pay off the smallest debt or the one with the highest interest rate.  What is really most important is to continue paying off the debt and not to get side tracked.  In other words you have to be dedicated to making sure you stick to this debt battle plan.

There you have all the steps you need to get out of debt.  If you make real commitment to stick to this debt battle plan you should be able to see the light at the end of the tunnel.  Just think of the reward at the end of this sacrifice you are making now and you will surely want to stick to this debt reduction plan.

By Roger Guzman, M.D. and Evelyn Guzman

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