Create your own ultimate debt elimination plan

by David Berky

The method is simple. 1) Set a monthly amount. 2) Pay all minimum amounts. 3) Pay extra money toward the debt with the highest interest rate.

This method will ensure that you pay the least amount of interest and repay your debts as soon as possible.

The trick to paying the least amount of interest possible is to pay extra money toward the debt with the highest interest rate. Obviously you want that debt paid off as soon as you can. Each month it costs you the most.

The trick to paying off your debts in the least amount of time is to set a fixed total amount to pay each month. The trap many people fall into is that they only pay the minimum payments. These minimum payments are designed to keep you paying that high interest rate for as long as possible.

By paying a fixed total amount each month, as one debt is paid off, you will have more money to pay towards another debt. This is often called the "snow-ball" effect.

But first things first.

First, determine you ability to pay. If your total payments are much more than you can afford, you are in trouble. You may need to contact a non-profit credit counseling agency. You can find them in your local phone book or online.

But be careful of companies that want an up front fee. Check with your local Better Business Bureau for recommendations.

Next you need to make a commitment to stop getting further into debt. Cut up your extra credit cards or put them where you cannot easily get them. If you are living a lifestyle that depends on credit, you will soon dig a hole you cannot easily climb out of.

Stop spending more than you make each month and don't count on future bonuses, inheritances, refunds or other non-dependable income to bail you out. If you make $2000 a month you can only spend $2000 a month. Look for ways to cut back and purchases you can postpone or do without.

Now, let's look at each step of your ultimate debt reduction plan more closely.

First, determine how much you can afford to pay each month toward your debts. At the minimum it should be the total of all your minimum payments for the current month.

You may need to examine your spending for the last several months. Find things you can eliminate or do without for a while. Postpone purchases, cancel subscriptions. Anything to free up more money to pay off your debts.

You may even want to postpone investing for awhile. Are your investments beating that 18% you are paying on your credit card? If not, a better investment would be to repay your debts.

Once you have your monthly debt repayment amount set, you need to write down each monthly debt you are paying. Record the creditor's name, the current balance, and the interest rate. Then take a separate sheet of paper and reorder the debts so that the debt with the highest interest rate is at the top.

Now as each monthly bill comes in pay the minimum payment. Subtract the minimum payment amount from your set monthly total. After all the bills are paid for the month, take any extra money left over and make another payment on the debt at the top of your list.

You can make an additional payment this month or save the money to add to next month's bill. But don't spend it!

As each debt is repaid, cross it off your list, but keep paying the total monthly amount you set at the beginning. This will accelerate your debt repayment and save you hundreds or even thousands in interest charges.

The two keys to your ultimate debt elimination plan are to 1) stop getting further into debt and 2) set your monthly debt repayment amount. The rest is easy. You will be debt free before you know it!

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