Becoming debt free might or might not have been a goal you identified when you put together your principal financial goals in step 2. Whether this was the case or not, you hopefully have realized that becoming debt free is possible with some extra effort and money, and in your interest (no pun intended) if you want to avoid paying the extra costs of oustanding loans. It might take you three years, 10 years or 20 years, but being able to say you have finally paid down all your debts is a huge achievement. And as we saw in the last few steps, the time it takes to pay off a debt can be sped up incredibly by making extra payments.
The next part of your mission and the main focus of this current step is for you to set yourself goals to pay off your debts. You will set yourself a target date to pay off the first debt that you have already started working on, then for each and every other debt you will do the very same, all the way to the very last debt you will be attacking. That will be your target date to becoming completely debt free. Continue reading →
From the previous step you are now up to speed about the positive effect of extra payments on outstanding debts. That leads us to the current step: start paying off a debt. You might think you are already paying off a debt, or several of your debts, but the point here is that you are going to pay off a debt faster by making higher monthly contributions than the minimum required.
When you pay off a debt faster than scheduled, a few amazing things happen:
You end up paying less interest, resulting in a lower amount of money paid back overall;
It takes less time to pay back the loan, meaning you can tick it off your list a lot sooner;
Psychologically it is a great relief to have paid off a debt: one less thing to worry about;
It increases your motivation by showing you that you can achieve your goals;
And here’s a great thing: once you’ve paid off a debt, that monthly amount you poured into this debt suddenly becomes available, which you can then use in its entirety to pay off another debt, meaning it keeps up that momentum!
After some rather depressing news to do with debt and interest, it is again time for some uplifting information. In this step we are going to look at how powerful it can be to put extra money towards paying off a loan and how much it reduces not just the time spent on paying back the money, but also the total amount paid back.
This information will hopefully inspire you to find ways of making extra payments towards reducing your debts. As even if they are small extra payments, in the long run, thanks to that friend of ours called compound interest, it will have a huge effect.
Let’s go back to the same example as the one I used in step 21 to illustrate how credit cards work, in which we looked at an outstanding debt of $1000, at a 1,5% monthly interest rate and a payback rate of 3% with a minimum of $10. But this time you make an effort each month to pay the minimum amount (3% of the outstanding debt) and an EXTRA $25 on top of the minimum amount. Let’s see how this works out. Continue reading →