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How to Make Debt Repayment Pay OffBy Jane Bryant Quinn
Sunday, September 22 1996; Page H02
"I find that folks are accepting this high interest cost as part of their budget," says Andrew Hudick of Fee-Only Financial Planning in Roanoke. "They become used to the expense and factor it into their cost of living."
If you got rid of that wasteful expense, you'd effectively give yourself a raise. Here's an eight-step guide from professional planners that will show you how to do it:
1. List each of your loans: how much you owe (most people don't know), the minimum monthly payment, and the interest rate. Total it up and try not to faint.
2. Restructure your debt to reduce the interest cost. You can transfer credit card balances to lower-rate cards. Or consolidate consumer loans on a credit union loan or home equity line of credit (provided that you won't run up your credit cards all over again). If you ask, the card issuer may lower the rate and the annual fee -- especially if you say that, otherwise, you'll get another card.
3. Make one-shot reductions in your loan balances. For example, run a yard sale and use all the proceeds to pay off debt. Sell off some stock you inherited. Use your savings, if you have any. Savings used to chop debt can pay you an 18 percent return; in the bank, they might pay only 5 percent.
4. Pay the monthly minimums on your lower-rate loans while putting extra money toward the highest rate loan. The faster you knock off high-rate debt, the faster your burden will decline.
5. Increase your monthly debt reduction budget, even if it's only by a small amount. Say you owe $5,000 at 18 percent interest, on which you're paying the bare minimum -- $100 a month. It will take you 39 years and four months to get out of debt. If you add just $25 to your payments, you'll be out of debt in five years and three months, saving $10,666 in interest.
6. Keep on paying the same amount each month, even though your loan balance goes down. The faster you pay off principal, the more interest you save and the faster your total debt declines. Once you've erased the highest-rate loan, start on the next-highest -- still paying the same fixed amount.
7. Work your way down the list, debt by debt. To keep yourself motivated, post your payment schedule on the refrigerator and check each one off. Give yourself a quarterly reward for staying on track.
8. For help, try the Debt Zapper, $15 from Bankcard Holders of America, 524 Branch Drive, Salem, Va. 24153. This service calculates the most efficient way to get rid of your debts and gives you a monthly repayment schedule for each.
If your debt has pushed you to the wall, the Consumer Credit Counseling Service can help you create a repayment plan (call 1-800-388-2227 for a local office). If necessary, a counselor will negotiate with your creditors to lower your payments. The service is free or at very low cost.
No debt reduction program will work unless your spending is under control. When couples discuss their budget, neither one should propose a spending cut for the other, says financial planner Faye Doria in Rochester, N.H. Instead, they should match each other's offers. If you'll save, say, $25 a week on some personal item, your spouse should find a specific $25 to cut from the budget, too.
Some people can go cold turkey for a year, spending money on nothing but basics and debt reduction. Others need to start with modest cuts. Do it your way, so you'll have a program you can stay with.
Planner Paula Hogan of Hogan Financial Management in Milwaukee suggests that you get your major fixed expenses taken out of your paycheck automatically -- for example, your mortgage, life insurance premiums and utility bills. The less money that hits your checkbook, the less you'll be tempted to overspend.
You don't have to cut up your credit cards. But you do have to leave them at home while you're paying off debt. Shop with cash, checks and a debit card.
It still pays to fund your tax-deferred retirement plan, especially if your employer matches money you contribute. After that, however, debt repayment becomes the best investment you can make.