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How to pay off your debt without running out of cash



Paying off your debt

Paying off your debt should be your ultimate financial priority because it is incessantly costing you money. Whether it is your credit card debt, the loan that you took to purchase a car or a property, or whether you simply loaned cash to meet some emergency, you have to pay interest and the more time you take to pay off your debt, the greater amount of interest you end up paying. Unless you have paid off your debts, your actual financial condition always rests on a shaky ground.

Financial institutes and lending agencies have no problem with you being in debt as long as you keep on paying the minimum payment – this way they can squeeze maximum amount of money from you aside from getting back their own investment. This is how they make money and in fact this is how every lender makes money.

But of course individuals who are in their right minds don’t want to remain in debts and they want to pay them off but other, immediate necessities take precedence over something that can be postponed to either next week, next month, or even next year. Since it is something that is not standing right in front of us (for instance, the electricity connection that is about to be severed if you don’t pay your monthly bill), it is easier to sweep it under the carpet for as long as possible. There never seems to be enough cash to pay off the debts.

This blog post on Lifehacker talks about using the stack method to pay off your debt without running out of cash. It simply means arranging your various debts in descending order with the most crucial debt at the top. Here are a few things you can do (not all the points appear in the original blog post):

Control your expenses and stop creating new debts

There is no use trying to pay off your debt when you are constantly creating new debts. For instance, if your credit card balance is already $5000 and it may take you many months to pay it off, what is the use of keep using it and accumulating it? This way it will be even more difficult to eliminate this debt. Don’t give in to temptations. Don’t go out for expensive lunches and dinners. Cook your food at home. Don’t buy new clothes unless it is extremely necessary. Do you really need that new phone or that new laptop? Remember that it is the job of the marketers to sell you as much as they can. It is not their problem that you are already in debt. They want you to buy more and more stuff so that they can make more and more money. They will use every trick available to them to encourage you to purchase from them.

So hide your credit card somewhere. If you notice most of the needless expenses happen due to impulse buying. In most of the cases you regret after buying. A gadget that seems to be a matter of life and death right now will be of no big deal after a couple of weeks of using it, really.

Start paying off the most expensive debt first

The higher the interest the more money you are paying. The high interest might be due to the amount of money you owe or because of the rate of interest the lending agency is charging. Whatever is the reason, if you delay, you may end up paying more than double the amount you have loaned. From the same link presented above:

if you have a $10,000 credit card debt at 20% interest where you pay a minimum payment of $200 a month, you will end up taking 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest!

Lower your interest rate by moving your credit card to another bank or lending agency

In order to acquire new customers banks and lending agencies continuously offer you attractive rates and encourage you to transfer your credit card to them. You need to be careful though, and read their terms and conditions carefully. But you can definitely get a good offer from another bank; if you do, just grab it and you will be amazed how much money you can save and how much more time you can get to pay off your debt without running out of cash.

Create a budget and stick to it

And make paying off your debts an integral part of that budget. It is just like any other expense, just more important. Remember that it is constantly costing you money so by not paying off your debt, you are not saving any money, you are actually spending more money. So even if you have to eat less tasty food and get less entertainment, so be it. In fact there are many individuals who are so serious about paying off their debts, that they start living like brokes even when they are not broke.

If you are careful you can always squeeze money out of your regular expenses. Can you reduce your monthly electricity bill by $20? Can you spend $50 less on beverages? Can you reduce grocery expenses by $40? Can you stop using your car altogether and use public transport for a few months (it will also make you healthier because you will be walking more). So it might not be something like drastically eliminating certain things from your life, it just means scaling them down so that you can save some money from every expense and then use that money to pay off your debt.

Create a repayment schedule

This is perhaps the most important point in the blog post and the strategy should really work. What you have to do is, while preparing your repayment schedule, assign the minimum payment amount to every debt that you have got because whenever you miss the minimum payment amount, you incur an expense in the form of interest. So the minimum amount of every debt needs to be paid every month. Then, from the money that you have obtained by curtailing your other expenses (in the point mentioned above – “Create a budget and stick to it”) add a considerable chunk to the payment of the debt at the top of your stack – where you are paying the most interest. The more money you add to the minimum repayment amount of the highest debt on the stack, the lower the minimum repayment amount you need to pay the next time. This cycle keeps on reducing your minimum repayment amount that, then you can use on the next debt in your stack.