Best Strategy To Erase Debt, For Good

There are two things that should take priority over paying off debt. The first is, accumulating $1,000 in a savings account. If you don’t have at least $1,000 saved, you should postpone implementing any new debt elimination strategies. Before starting on your debt, you need to have enough money saved to deal with a sudden emergency if one were to pop up. Focus on saving at least $1,000 in a high-yield savings account before even thinking about attacking your debt.

The second thing you should do before paying off debt is to contribute enough to your 401(k) to get the maximum employer match. 401(k)s are one of the best investments available. It doesn’t make sense to pass up on the opportunity to invest in one when your employer is willing to pay you to do so. Once you have $1,000 saved, transition your focus to contributing enough to your 401(k) to get the maximum employer match. If your employer doesn't do any matching you can skip this step.

Once you’ve checked both these items off of your list, debt elimination is the next step.

In order to pay off your debt, you must determine exactly how much you owe and whom you owe it to. Gather the paperwork for each debt and organize the following information into a table: debt name, total amount owed, minimum required monthly payment, interest rate, and creditor’s phone number. This document now contains all the information you need to pay off your debt. Keep it handy so you can reference it throughout the process.

One aspect of being in debt that many are unaware of is the ability to negotiate with the creditors. Creditors are willing to negotiate payment due dates, interest rates, payment amounts, and sometimes even the total balance owed. It’s even possible to have some debts—usually medical bills or student loans—forgiven in full (typically this is available to those with lower incomes). To begin the negotiation process, simply call your creditor directly. Start with the accounts you’ve held for the longest. These creditors will be more likely to negotiate with you since you have a more extensive history as a loyal customer. Once you have them on the phone, politely explain your situation and ask them to accommodate you. Be sure to be as specific as possible in what you are requesting. Ideally, you’ll be able to have all or a portion of your debt forgiven. This probably won’t happen for most debts but, minimally, you should ask each creditor you speak with, to lower your interest rate. Here are some examples of things you might say:

“I’ve been a loyal customer for the last 10 years and I’d like that relationship to continue. I feel the interest rate on my credit card has gotten too high. Whom can I speak to about lowering it from 20% to 10%?”

“I was recently laid off from my job and can now only afford to pay about $50 per month towards my loan. Can we discuss lowering the minimum monthly payment from $100 to $50?”

“<Explain situation> Are there any loan forgiveness programs for someone in my situation?”

“I receive my paycheck on the 1^st of each month. I’d like to change my payment due date to the 1^st as well. Can you help me with that?”

“I’ve received credit card offers in the mail with much lower interest rates than my current one. I’d like to discuss lowering my rate to a more competitive 12%.”

Note: Always speak honestly when negotiating. Lying about hardships to avoid paying creditors could potentially backfire.

After contacting each of your creditors, you’ll hopefully have negotiated favorable terms for each of your debts. If not, don’t fret; you will soon be erasing all your debt for good!

As mentioned above, you should already be contributing enough to your 401(k) to receive the maximum match from your employer. All additional funds you have in excess of this amount—after paying required bills—should now be allocated to paying off debt. Take a look at your budget and decide how much you can afford to pay toward your debt each month. This may require you to make some temporary spending sacrifices (e.g. less eating out, cutting cable, reducing travel, moving to a less expensive apartment, less partying/going out, selling a car, etc.), but you’ve got to stay strong! Becoming debt-free is within your reach.

To pay off your debt quickly and efficiently we are going to use a method commonly referred to as a “debt avalanche”. This method will save you both time and money as you pay off your debt. It goes as follows:

• Organize your debts in order from highest to lowest interest rate.
• Each month, pay the minimum required payment on each debt.
• Apply all additional funds to the debt with the highest interest rate.
• When a debt is paid off, add its payment to the debt with the highest interest rate.
• Continue this process until all debt is paid.

Let’s do an example.

Greg has always paid only the minimum required payment on each of his debts. This strategy has left him feeling like he’ll never be out of debt. He decides to work on becoming debt-free.

Greg gathers information about each of his debts and organizes it into the table below.

Starting with his oldest account, Greg calls each of his creditors to request a lower interest rate. He is successful in lowering the rate on his two credit cards, one from 20.0% to 17.5% and the other from 17.0% to 15.0%.

Greg looks over his budget, and by cutting cable, going out less, and moving into a less expensive apartment, he finds that he can afford to allocate $850 per month to pay off debt.

Each month, Greg pays the minimum on each debt. He then applies the remaining $200 (i.e. $850 - $650) to the debt with the highest interest rate.

Month #1 Payments

When Credit Card #1 is paid off, Greg will take the $450 he was paying toward it and add it to the $125 he is paying on Credit Card #2 ($575 total). Once Credit Card #2 is paid off, Greg will use the $575 he was paying toward it and add it to the payment on the debt with the next highest interest rate. Greg will continue this process until all debts are paid.

In total, it will take Greg a little over 5 years (about 64 months) and cost him $13,400 in interest to pay off the $41,500 he owes. If he had continued to pay the minimum on each debt and stuck with the original interest rates, it would have taken him 14.5 years and cost him a whopping $34,371 in interest!

By utilizing the techniques and strategies described above, Greg was able to finish paying off his debt more than nine years early and he avoided $20,971 in interest payments while doing it!

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