Debt Elimination

What’s the best way to eliminate unwanted debt? Psychological reasons aside, you’ve got to look at the bottom line here since we’re talking money. You’re getting charged interest every day on the money you owe. The faster you can get out of debt the less interest you’re charged and the more money you save.

So, the best debt elimination plan gets you out of debt quickly and for least amount of money. At least that’s my definition of “best” in this context. How quickly? Months, not years if you do it right. To make that happen, you’ll probably need to make some sacrifices.

Divert Savings

Whatever you’re currently saving, temporarily divert it to your debt elimination plan. For instance, if you’re saving for the down payment on a personal residence, a very worthy financial goal, switch it over to debt reduction.

Consider doing the same for IRA contributions and employer retirement plan contributions too. If you’re lucky and have an employer match, contribute just enough to get the full match. All the rest temporarily goes toward debt reduction.

Debt Elimination Percentage

The idea is to raise your debt elimination percentage as high as possible. This percentage of your net income is what you’ll be taking right off the top of every paycheck and putting towards reducing your debt. Obviously, there’s a give and take between this percentage and what’s left over to cover your living expenses.

Keep in mind your debt elimination period is finite. Getting out of debt quickly and for less money is worth making some temporary sacrifices.

Bottom Line

Some say you should get rid of your smallest debt first. Others say the debt that makes you the angriest should be number one on your list. Once again, bottom-line, eliminating debt with the highest interest rate first gets you out of debt faster and for less money.

If you’re dealing with more than one debt, concentrate on eliminating the highest interest rate debt first. Add the money generated from your debt elimination percentage to the regular payment of your highest interest rate debt. Continue to make a regular payment to the others on your list until debt #1 is eliminated. Then it’s on to debt #2, the debt with the next highest interest rate, and then debt #3 if there is one.

Multiple Debt Elimination Example

Making Payments

Usually, it does you no good to make an early payment to a creditor, or to a vendor for that matter. In fact, paying early can rob you of utility via a less robust cash flow. When I say creditor, I mean your mortgage company, student loan servicer, credit card company, or auto financer. By vendor I mean who you pay for electric, gas, phone, and subscription services.

The exception is when making credit card payments and payments on home equity lines of credit. These payments should be made as soon as money becomes available, regardless of the due date. By making early payments on credit card debt, you can pay that debt off faster than you ever thought possible, and this strategy doesn’t cost you any extra money. If that sounds a bit magical, it is: The magic of math and saving on compounded daily interest.

Old Debt

I’m a believer that if you owe money, you ought to pay it back. However, sometimes you forget about old debts through no fault of your own. For example, an old medical bill for whatever reason never caught back up with you after you moved. Same with electronic bills sent to spam filters, outdated email addresses, or it could be identity theft related.

You can guard against these occurrences by checking your credit reports for free at least once a year at AnnualCreditReport.com. That’s the legitimate URL where you can view and download your three credit reports from Experian®, Equifax®, and TransUnion®. Any credit opened in your name, including by identity thieves without your knowledge, will show up on these reports. Then you can clean up any messes, pay what you owe and be done with it.

Improving Your Credit Score

Any past transgressions still on your credit reports will mean less and less as time goes on and will eventually disappear. In the meantime, you can improve your credit score using a credit card by using it responsibly, and it won’t cost you a dime.