A few months ago, we discussed how maintaining a “healthy budget” can keep everyone on course in reaching the lifestyle dreams of their future. It is also a great tool to help you get out of debt too, since debt is the primary reason that prevents most people from reaching their financial goals. So today we are going to discuss 2 types of debt and then go over 3 strategies that will help you stay on track towards eliminating that debt for good.
All debt is not the same and understanding the difference between secured and unsecured debt will help you prioritize your payoff strategy.
- Secured Debt: Any money that is borrowed is attached to an asset that is considered collateral, meaning that if you don’t pay back the loan – the asset/collateral will be taken away and sold off to pay your debt. In addition, if the asset/collateral is sold for less than what you originally borrowed, then you may still owe the difference. Your home and car are examples of secured debt.
- Unsecured Debt: Any money that is borrowed is not attached to an asset therefore you will not lose any tangible items – However, you are still held accountable for what you owe and creditors have a number of tools at their disposal to get their money paid back such as, reporting to the credit agencies which will lower your credit rating, garnishing your wages or by hiring a debt collector. Credit cards and medical bills are examples of unsecured debt.
Now that you understand the difference in each type of debt let’s look at a few strategies for paying down your debt. But first, a must do before you add any new strategy…
PAY YOUR MINIMUM BALANCE ON EACH OF YOUR BILLS EVERY MONTH!
By paying your creditors the minimum balance each month, let’s them know that you are staying on track and it keeps your accounts from receiving any negative feedback with the credit bureaus. Once you have paid your minimums you can then take the extra cash to pay down your debt in one of the following ways.
- Snowball System: In this plan, you will organize your debt from smallest to largest then pay any extra money toward the smallest debt each month. Then once you have paid of that bill then start paying down the next largest and so on. The benefits here are that you will see one of your debts being paid of sooner which is a great boost to your financial goal.
- Avalanche System: This plan is much like the ‘Snowball” method instead you arrange your debts according to the interest rates from highest to lowest then pay the highest rate bill first until it has been paid off then move on to the next highest, and so on. By taking the interest rates into account, you are putting more money toward your higher interest rate debt first. Not only does this approach save you money, “it gets you completely debt-free faster.
- Financial Fast/Debt Detox: Since we have been discussing how to get financially fit, why not take it a step further by doing an actual spending fast? With this method you will be required to honestly ask yourself, “What do I really need?” – vs – “What do I really want?” Then make a list for each question. Once you have your two lists… then for the life of your fast (1 yr.?, 18 mos.?, you decide), spend your money on only what you really need each month and then use the rest of the money to pay down your debt until it has all been paid off. Once you have accomplished paying off your debt, but your spending fast isn’t over yet, then start putting the monthly income into a savings account and continue this habit until your fast has been completed. At the end of your financial fast, I am sure that you will be super impressed on what you have accomplished!
As with any goal that you are trying to achieve, be it financial goals or health and fitness goals, you’re more likely to succeed if you have a good plan in place, a fair amount of willpower and a desire to change your habits.
Make it a great day!
Marla J. Blanchard
MJB’s Bookkeeping Solutions
Don’t keep me a secret, if you know someone who could use a bit of Bookkeeping TLC let them know that they are not alone and have them call me 805-764-1MJB (1652).