Debt Is An Ugly Word (How To Get Out Of It Quickly)! Part 2

In part 1 we discussed the different ways people can borrow money, in part 2 we will discuss how to reduce the debt the hardship has brought you.  Once you are in a better place financially you will want to start focusing on your debt.

Family and Friends – This is a sticky situation.  Some family and even a few friends will not want you to pay them back the money you borrowed.  Even if they do not want you to pay them back it is advisable to do so anyway.  If you ever have a need again in the future to borrow money they will be more likely to do so if you paid back the original loan.

Personal Loan – There is not too much you can do here.  These types of vehicles are usually fixed and have a defined payment over a specified period of time.

Retirement Plan – When discussing the withdrawal with your tax advisor you should also discuss if you will need to repay the money to the plan or not.  I am not a big fan of taking this money in the first place what good is it for retirement if you have to live on the streets today.  If possible and the laws allow you to repay it, by all means do so if possible.  Get that money back into its tax deferred or tax free plan.

Home Equity Line Of Credit and Credit Card Debt – I bunched both of these together on purpose.  There is a specific payback method that we will review here.  This makes it easy to put these two together. 

Let’s say you have been using these two instruments to get you through your hardships.  You have not only maxed out your credit cards but you also added debt to your Home Equity Line Of Credit.  There are a few steps to take to work out a proper repayment plan.  This type of plan has been time tested and is proven to work.  It is the fastest repayment plan I have ever seen.

Sit down with your spouse and plan on spending an hour or two on this.  You want your spouse with you because this plan will affect the both of you.  Start working through these steps:

1- Although you may have already done this when you were going through the financial hardship you should do this exercise again.  Discuss if there are any things you can cut out of your budget or are there any things you can cut back on.  If you do come up with some dollars that you can cut back on write the total number that you came up with down and put it on the side for now.

2- Have all current credit card statements and any Home Equity Line Of Credit statement out for review.

3- List all of the HELOC and credit card debt out in dollar amount order.  List the dollar amounts from the lowest first to the highest dollar amount.  For example you have three credit cards that have balances of $975, $28,320, and $23,187.  You also have a HELOC total debt of $78,950.  List the lowest debt first ($975, $23,187, $28320, $78,950)

4- What you are going to do is pay the minimum amount on all debts you have listed on the paper.  This holds true for all of them except the lowest payment you have.  You will take any extra money you have for the month (including the extra money you put away in step number one above) and you will send all of the extra dollars you have to the lowest balance credit card.  So let’s say your monthly payment on that $975 credit card debt is $60.00, you found an additional $40.00 per month that you were able to cut back on, you would then send $100.00 to the credit card that has the lowest balance.  You will keep doing this until the lowest balance credit card is paid off.

5- Now you have an additional $100.00 to apply to the next lowest credit card balance you have.  You will keep doing this until all of your debt is gone.  Once you get started it is a snowball effect.  The start is slow but the plan will start picking up steam and eventually it will get going very quickly.

Getting in debt can take full and total control of a family’s finances.  Make sure to do what you can to get the money to pay it down.

Strategy Based Profits TIP: – Do what you can to cut expenses, start paying sown the debt and watch the debt start to snowball away.

Robert J. Roy
Money Man