The first step to Financial Independence is getting rid of installment debt.
Remember installment debt are those debts that you are trying to pay off. Medical debt, car loans, mortgages, etc.
An installment debt is just a black hole for money, but sometimes they are inevitable. Accidents happen, and sometimes your emergency account won’t be enough.
Whether you are just starting out learning to manage your money better or if you just had to take on an installment debt, there are ways to pay it off quickly.
First Step -- Strategy
There is a trick to getting out of debt quickly and saving on interest charges!
You must pay your minimum payment and then pay extra toward your principal. You must either mark your check as for principal on the memo line of your check or talk to a representative to make sure the extra payment is earmarked toward principal.
The less principal on the balance, the less interest you have to pay since interest is calculated as a percentage of the principal amount.
Second Step -- Plan
You will need to gather the balances for every debt you need to pay off. Then you need to figure out what method you will use to pay them off. This will help you map out the best way to become debt-free.
Bankruptcy is an option for those who have a lot of debt.
There are two kinds of bankruptcy.
Chapter 7 bankruptcy will let you keep some or most of your property and discharge most types of unsecured debt. Some property may be sold to pay your creditors. This type of bankruptcy is usually limited to those whose income is less than the median for their state.
Chapter 11 requires that you repay your creditors for a term of 3-5 years. After that, your remaining debt is discharged. The only qualifications are that unsecured debt is less than about $419,000 and secured debt be less than about $1,258,000.
Bankruptcy does follow you for a while. First, it does crash your credit score. Then, Chapter 7 bankruptcy stays on your credit for 10 years, while Chapter 11 falls off after just 7 years because you do pay back some of the money.
After some time, you can bring your score back up. Especially if you get a secured credit card, keep your utilization rate low, and make timely payments.
Student loans can’t be discharged in bankruptcy.
If you have a lot of credit card debt, there are companies that will negotiate lower balances for you. You may stop paying your debtors, instead putting monthly payments in a savings account to use to pay the debt off all at once.
Be careful when using this method. Some companies are legitimate, while others are scams.
Consolidation is when you take multiple debts and combine them into one, usually by using a personal loan or consolidation company.
This can save you money on interest, and make things simpler to pay off.
Negotiating with Debt Collectors
Don’t be afraid to negotiate with your debtors. The worst they can do is decline your offer, but plenty of 3rd party debt collectors will settle for less than you owe, especially if you offer them a substantial portion of the balance at once.
Paying it Off with Muscle
If none of the above options are for you, and you just pay it off using step 1 mentioned above, then plan it strategically.
There are two methods people use for paying down debt quickly.
Avalanche Method pay off big debts first, then small debts.
Snowball Method pays off small debts first then large debts.
You must continue paying minimum payments on all your debts so you do not rack up late fees or acquire more interest.
Once you pay off a debt, then put that money towards another debt payment so you are constantly paying more towards your principal!
I have mostly student loan debt. What kind of debt do you have?
Hi! I am Ali, a homeschool mom who is passionate about science, managing my money and time well. Unfortunately, with an army of tiny faces, I am always still kind of a mess.
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