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A Closer Look at Four Debt Management Strategies
Consider the following debt management strategies using the example debt below... Pay attention to how the plans improve as you go down the list.
Minimum
Name % Rate Total Payment - Sears 18% $4,500 107
- Discover 16% $4,200 63
- Visa 13% $3,700 76
- Car loan 17.5% $2,000 51
Total debt $14,400
Total minimum payments 297
Additional monthly earnest $ ____ ?
Please - No New Debt!
The absolute first rule you must follow for any debt management plan to work is...no new consumer debt. Any new charges on your credit cards must be paid off at the end of each month IN FULL, WITHOUT ANY EXCEPTIONS. In the end, all exceptions are excuses, and excuses are made by dependent people who are not determined enough or focused enough to persist and succeed.
Plan #1- Focused on
Income and Expense
You make all the minimum payments. Unfortunately, the minimums on most credit card accounts are calculated based in part on your account balance. This means your minimum payments will shrink, stretching out the time you are in debt and maximizing the amount of interest you pay on the debt. Using the example above, the payoff for this debt management strategy would be the following for this debt...
- Total time 181 yrs, 8 mos
- Total interest $71,990
- Total Paid $86,390
Plan #2- Ignore Your
Shrinking Minimums
You make your minimum payments, and continue making the original minimum payments, ignoring the shrinking minimums on your statements. Changing your debt management strategy to use this single improvement, your repayment of the debt would look something like the following...
- Total Time 18 yrs, 3 mos
- Total Interest $14,001
- Total Paid $28,401
- Money Saved $57,989
- Time Saved 163 yrs, 5 mos
Plan #3- Getting More Serious
With the next two debt management strategies, you become more aggressive. Both plans share the following steps...
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1.- Make all of your minimum payments
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2.- Ignore shrinking minimum payments
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3.- Do Not add any new consumer debt
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4.- As debts become paid, the money that was earmarked for those debts will be applied to your other outstanding debts.
At this point, the order in which you pay off your debt is your most important consideration. In plan #3, you will repay your debts according to the number of months you have until each debt is paid off. Whenever there is extra money, the debt with the fewest number of months will be focused on and paid off first.
While this is not the absolute quickest strategy, it offers one advantage. Most people need a little extra something to keep them motivated and "on the ball" as they try to persist in their debt management goals.
By ordering your debts in this fashion, you set up a reinforcing system. You should realize your first success relatively quickly. With progress to acknowledge, your belief in your plan strengthens, focus on your next goal increases, and your motivation will become less of a problem.
Learn why this is also a system of dependency. Using this strategy, the repayment of our example debt would be as follows...
- Total Time 6 yrs, 7 mos
- Total Interest $9,029
- Total Pai $23,429
- Money Saved $62,961
- Time Saved 175 yrs, 1 mo
 This strategy is one of two debt elimination strategies
that we recommend. If you choose this strategy as your plan, print out this debt worksheet A and continue.
You may right click and print, or the link will open a new window from which you may print.
Go to the instructions- Worksheet A
The Importance of
Extra Contributions
This is a great way to speed up the debt management plans above and below. Your minimum payments go mostly to interest. People who earnestly want to improve their positions financially will find extra contributions each month to help pay off their debt.
Since your extra contributions go directly to principle, you cut years off the repayment of your debt very quickly (and save interest). Look what a contribution of just $50.00 extra each month does (compared to the example above)...
- Total Time 4 yrs, 11 mos
- Total Interest $6,412
- Total Money Paid $20,812
- Total Money Saved $65,578
- Total Time Saved 176 yrs, 9 mos
Plan #4- The Best Plan
With the best debt management strategy, you will...
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1.- Make all of your minimum payments
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2.- Ignore shrinking minimum payments
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3.- Do Not add any new consumer debt
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4.- Agree to a monthly "earnest payment"
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5.- As debts become paid, the money that was earmarked for those debts will be applied to your other outstanding debts.
In addition, you will contribute extra money to the plan whenever you can afford to do so. Finally, you have just one question to answer...
Where do you apply the extra money to eliminate your debt the fastest!
The answer is to order the repayment of your debts strictly according to the interest rates on the debts. Whenever you have the extra money, pay off your higher interest rate debts first, working your way down the list to your lower interest rate debts.
With the above in mind, always try to maximize the amount of your extra contribution each month. If you can afford $150 extra each month, than commit to it. If you find you can pitch in an extra $235 in July, than do it. Your extra contribution should never be less than the earnest payment you agreed to.
You will not have a reward system to be dependent on here. Instead, keep your focus strong and your motivation high by considering what it means to be financially independent, which should always be your number one debt management goal.
 This strategy is one of two debt management strategies
that we recommend. If you choose this strategy as your plan, print out this debt worksheet A and continue.
You may right click and print, or the link will open a new window from which you may print.
Go to the instructions- Worksheet A
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