8.4.10

Eliminating Debt: Step 2

So now that you have quit diving further into debt by using a strict cash-only budget, it's time to start paying off the debt. And since it's highly unlikely that you'll be able to pay it all off in the first month, step 2 is to prioritize.

How to Prioritize Debt:
Start by making a list of all your creditors, your balance, and the interest rate they are charging you. Example:

Bank of America Visa: $3750; 22.1%
Ford Credit: $8,400; 8%
Gap Credit Card: $475; 18.9%
Dr. Smith: $800; 10%

Then, rank each creditor by interest rate. Set aside a specific amount each month that will go toward debt reduction. With this amount, starting paying off your debts in order of interest rate (in this example, pay off Bank of America first, then Gap, then Dr. Smith, the Ford). The purpose behind this prioritizing is to get rid of the debt that is most expensive to you first. So, in the case of your Bank of America debt, each dollar in your balance is costing you 22.1 cents per year, whereas Ford is only charging you 8 cents a year on a dollar. Get rid of the credit card debt first! (Note: Keep paying your monthly minimum to ALL your debtors as you go through this process to avoid default) Once you pay off one debt, move to the next.