Debt Free

The aim of this article is to help you build a strategy to pay off your debt in a timely manner. In this day and age a large amount of debt can impact your future life. The below steps are a reflection of strategies I have tried for my own financial situation. 

Remove the Temptation

Prevention is always better than cure. The first step is to ensure that all the hard work that you do over the next few steps is not wasted. It is pointless to try and pay off a credit card whilst you are still spending money on that credit card. A few options to avoid temptation are:

  1. The Freezer Strategy: place your credit cards in a container full of water and leave in your freezer. I find this strategy pointless as it does not take a lot to defrost the ice and retrieve the card and also if you are like me and only have a small freezer that space can be used for ice cream.

  2. 2.       The Lock Box: I used this strategy for a long time where you simply buy a cash box from your local store like staples or Officeworks. Put your cards in and lock the box, hide the box under your bed and then leave the key at work. Yet again temptation will probably expose you for the “Spender” you are and you will simply get access to the cards again.
  3. 3.       The Play Mist Strategy: That’s right just like in Clint Eastwood’s movie “Play Misty for me” you chop them up maybe not with a knife like in the movie with the painting but maybe with a pair of scissors. When chopping up credit cards ensure you do a good job of it and dispose of the card in a manner where a person who finds the pieces will not be able to gain access to your Credit Card numbers and then go on a shopping spree on Amazon.

Congratulations you are now temptation free (I hope) each step is a good step 

Understand and Compile your results

The next step is where we get a reality check. First of you want to get all your details down on paper so you can assess what the overall debt looks like, I find the easiest way is to use a spread sheet and follow the steps below

  1. Start with a blank piece of paper or preferably a Microsoft Excel Spread sheet
  2. List the Name and Type of your debt, for example Ford Bank Credit Card
  3. In the next column list the Credit Limit for each form of debt ( if it’s a personal loan use the initial amount when the loan was taken out)
  4. Now list the Balance for each
  5. Finally list the interest rate for each

Now that you have all your debt listed in front of you sort the totals so the lowest balance is at the top and the highest is at the bottom, you should also add a totals column at the bottom ( I attached an image of what it should look like). Print the spread sheet out and take some time to look over it and absorb the totals and the compiled total.

This was the hardest part, now that you have accepted the amount lets find a way to pay it off

Come up with a game plan

The first step is to decide how you want to pay off your Credit Cards and which ones to pay off first, financial it is better to pay off the account which has the highest interest rate as that account is doing the most damage. I find the best method is to tackle the smallest balance first. Similar to a weight lifter, you start off with small weights and then put more weight on as you conquer the smaller weights. The best thing about using this strategy of paying off the smallest balances first, is the feeling of reward from accomplishing your target. Once the Credit Card has been paid off, call the bank and cancel the card.

Something that will help you along the way is to use a white board or notepad to track your progress. Use a thermostat image and as the debt is paid off lower the temperature. I find visual representation helps you to stay focused.The reason I don’t suggest evenly spreading you payments across all your credit cards can easily be explained with an example.

If you have $2,000 of additional money to help repay your credit cards per month, if you spread it across 4 credit cards that is only $500 on each, but if you pay it onto one credit card which has a balance of $2000 than you have already achieved your first goal and paid one of the credit cards off.

Don’t Forget “Pay all your extra money onto the smallest balance” enjoy the feeling of reward when you cancel your Credit Cards one at a time


Future Strategies

Once you have achieved your goal of being debt free you have a decision to make. Do you get a credit card again?

I would suggest being debt free for a while before signing up for your next credit card. If you do decide to get another Credit Card here are some tips that can help you from falling into future traps.

  1. Keep a low Credit Limit. What the banks don’t tell you is that when you go for a home loan or any other transaction which requires a look at your Credit Report, the Credit Limit is what the bank looks at not the balance of the Credit Car, this means if you have a $15,000 credit card with only a $50 balance, the bank will count the $15,000 limit and not even look at the $50
  2. Every time you make a purchase on your credit card, transfer money into a high interest account, this way when the bill comes at the end of the month you already have the money to pay the Credit Card to a $0 balance.
  3. Never only pay the minimum amount due, this amount is calculated to ensure that if you stop spending today and only pay that minimum amount, then you will spend many years paying it off.

Good Luck in becoming debt free. Remember to enjoy all the small wins on your way to being debt free