Basic Laws Of Making Money #2 - Pay Off Debt

If you have too much debt, it’s like being the coyote in a roadrunner cartoon with a piano hanging by a thin rope over your head. Even if you’re not looking at it, your subconscious mind is aware of it all the time. You may not believe this, but even if you think it doesn’t bother you, the awareness of the debt you carry affects you in subtle ways.

The best way to get rid of your debt is to pay off the highest interest debt first. Even if it’s your car. By paying off debts with the highest interest rates first, you’ll begin to put compounding to work for you, instead of against you. You do this by using the money you save on interest to pay down the next debt even faster. Once you get the ball rolling, it’s gets easier to keep it up.

The basic plan is simple. You figure out how much money you can afford to pay down your debt with. If you’ve already read Part 1, you know that this comes after you pay yourself. You always pay yourself first.

Once you know how much money you have to work with, you figure out the minimum payments on each debt. That’s your nut. Now we can figure out the best way to crack that nut.

The next step is to find the debt with the highest interest rate, then the next highest, and so on. The one with the highest interest rate is your first target. Don’t worry about the balances on any of these debts. It doesn’t matter. You want to pay off the most expensive loans first.

Once you have your target, you take the total amount of money you have to pay off your debt each month and subtract the total of all of the lower interest debt’s minimum payments. Why? because you’re only going to make the minimum payment on each debt except for your target. Once you’ve paid the minimums on all of the lower interest debt, you take the rest and apply all of it to your target.

For example, if you have $500 each month for your payoff plan, and the minimum payments on all of your lower interest debt equals $250, then you’ll have $250 left over which will all be used towards paying off your target.

You continue this process with the next highest interest debt after your first target is paid off. Then your new highest interest debt becomes your next target.

If you follow this plan, you’ll be out of debt and have money in the bank in no time!