Fall 2010Borrowing Basics
Got Debt?
Here's Your Plan to Pay it Down.
We know what it's like: Sometimes debt just quietly adds up and before you know it, making those monthly payments is an overwhelming challenge. But ignoring the problem and not making changes won't make the debt go away - or help your long-term financial health. The only solution is to get focused, make a plan and get back in the black. Here are some straightforward tips to help you do it.
Step 1. Write it down.
The first step in paying off debt is to know exactly what you owe. So make a chart that includes who you owe, your balance, minimum monthly payment and interest rate. (Don't include larger, long-term loans such as your mortgage or auto loan.)
For example:
| Debt | Balance | Minimum Payment | Interest Rate |
| Credit Card | $8,000 | $160 | 18% |
| Store Card | $500 | $10 | 14% |
| Personal Loan | $4,000 | $40 | 9% |
Step 2. Determine your disposable income.
Next, you need to know how much money you really have that can go toward debt payments. Start by figuring out your monthly expenses — everything from utilities and groceries to your mortgage and the minimum monthly payments on your credit cards. Subtract the total from your monthly income. Then decide how much of what’s left you're willing to apply toward your debt. (Leave a little "fun money" in the budget; if you deprive yourself too much, it will be harder to stay committed to your plan.)
Step 3. Pay more than the minimum.
If you simply make the minimum payments every month, it will take you a long time to pay them off, and you’ll pay a shocking amount of interest. So pay as much extra as you can. (The exception is when you’re using the "snowball" concept explained in the next section.)
Credit Card with an $8,000 balance...
| If you pay... | It will take... | And you'll pay total interest of... |
| The $160 minimum every month | 566 months (47 years!) to pay | $22,397.15 |
| $260 every month | 42 months (less than 4 years) to pay | $2,810.76 |
Step 4. Take the snowball approach.
The idea here is that you concentrate on one debt at a time. Pay the minimum on all of your debts except one; for that one, apply all the extra funds you identified in Step 2. This way, you’ll pay off one debt faster. You then take everything you were paying on that debt (minimum payment plus extra funds) and apply it to the next debt in line, along with that minimum. Each time you pay down a debt, your extra funds "snowball," giving you a larger and larger chunk to put on the next debt in line.
How do you know which debt to start with? Experts typically recommend either 1) choosing the debt with the highest interest rate, since it's costing you the most, or 2) choosing the debt with the smallest balance, since it can give you faster gratification.
Step 5. Prevent a repeat.
Once you start getting your debt under control, take steps to make sure you don't get buried again. One of the most effective moves is to create a realistic budget. Then stick to it — and enjoy some financial peace of mind!
First National Bank can help. For instance, Online Banking and Online BillPay can make it easier to keep track of your finances and make timely payments. Learn more at bankgreentoday.com.
Find it at firstnational.com...
- "What will it take to pay off my balance?" and "Should I consolidate my debts?" - Visit these helpful calculators.
- Create a Budget worksheet - view the "How much am I spending?" calculator.
