Debt has plagued many people when it comes to their financial goals. It is so each to get into Debt and can be very difficult getting out of debt. So what is debt? Debt is when you owe someone /or company money for a service that was provided. This could be a loan on a house. This could be a credit card. Any easy way to understand this is if you have a balance from any type of service, where you didn’t pay the full price, you have a debt. So today we are going to talk about debt and discover what we can do about lowering our debt with the goal to eventually getting rid of it.
Add it all up
First step with debt, understand exactly how much debt you currently have when it comes to your finances. This is a painful step. No one wants to see how much they are behind on their finances and it can become somewhat depressing. But if our goal is to reduce or eliminate our debt, we have to be realistic. We have to be honest with ourselves so we can attain our goals. Here are some steps to get you started.
- Create a list of all your debt by writing down the name of the business.
- Write down the current balance.
- Write down the interest rate.
- Write down the minimum payment required.
Add up all of these debts to find out exactly your financial situation. My wife and I like to use a spreadsheet so we can print it off and post in our office. The visual effect works. I can actually see my debt and for me, it motivates me to keep focus on the goal: get out debt.
If you have read my other post on budgeting; my wife and I do this step within our budget for a couple reasons. 1) We want to make sure our payments are correct so we don’t underpay the loan. 2) We want to know what are interest rate is for each loan and see what we can do to lowering those rates.
The nasty interest rate…
What is interest rate? Interest rate is the percentage that you pay to the lender for borrowing their money. This is how they make money by charging you a rate off the outstanding amount.
So when you are paying off your debt, having high interest rates can slow down the process because you have higher payment.
Here’s how to calculate your interest charge (numbers are approximate).
Divde your APR by the number of days in the year. Multiply the daily periodic rate by your average daily balance. Multiply this number by the number of days (30) in your billing cycle.
Loan 1: $5,000 loan. The rate is 15%.
Here’s how to calculate your interest charge.
- Divide your APR by the number of days in the year.0.15 / 365 = a 0.00004 daily periodic rate
- Multiply the daily periodic rate by your average daily balance.0.00004 x $5,000 = $2.05
- Multiply this number by the number of days (30) in your billing cycle.$2.05 x 30 = $61.64 interest charged for this billing cycle
Month 1: So when you make a payment of $100 dollars; $61.64 goes towards interest and $38.36 goes to the actual loan (principal).
Next month, our loan is $4961.64. The rate is still the same at 15%
We already know our daily periodic rate is .00004. Multiply .00004 x $4961.64 = $1.98 . Multiply this by 30 days = $59.53 interest for this cycle.
Month 2: Our next payment of $100 dollars breaks down as $59.53 towards the interest and $40.47 goes to the actual loan.
As you can see, the interest can really slow you down on paying off the principal amount of the loan. But we as consumers can make the situation worst when we add more debt to our credit card. If we are adding more debt, we are adding more interest.
Pay it off now!
If we want to have a financial independent lifestyle, we have to get rid of our debt, it’s that simple. What we have to do is live within our means. So how do we get there?
First, we take our list from earlier and start working on each debt. My suggestion is work on the lowest balance first. This will help motivate you on the next debt. After you work out your budget for the month, see if there is any extra that you can put on the debt. Maybe like I mention from my other post you find an easy side job to help pay extra.
Second, many credit cards have low interest rate transfers. Make sure to read the fine print. Normally there is still a fee for balance transfers, even if the interest is 0% for 12 months. But if you can lower the interest rate, it can help you pay off the principal faster and then you can focus on your next bill.
Some people believe in snowballing your debt. This is where you pay the minimum on all your loans except for the one that you are focused on paying off first. Then after you are done with that loan, you take the amount that you where paying on the first loan and apply it with the minimum on your second loan. You would follow this on each loan as you pay them off. This is to speed up the process of paying off your debt. Check out this debt reduction spreadsheet that I have used in the past.
Light at the end of the tunnel
Taking on your debt is a challenge, but if you stay positive and focused on your goal, you can and will pay it off. Try hard to not add debt. In my next post we will talk about living within your means so you don’t get yourself in a situation where your debt is out of control. Please comment below on what has worked for you as you tackle your debt or any questions that you may have. As always, stay positive and pursue your goals!