Step By Step Debt Reduction Plan

[questions]

I'm in debt to the tune of $20,000 on credit cards. I have been doing a lot of reading and what I really need is a simple, 10 step debt reduction plan. I don't need book recommendations. I have a hard time getting through the chapters. I just want a 10 step (or however many steps it takes) plan so that I can have a basic overview of what I need to do. Can you give me such a ten step process?

[skydivingchic]

Step 1: This is the most important step. Resolve to stop spending money you don't have. Put away the credit cards for a while. Freeze them in a block of ice if necessary. If you don't address the spending issues that got you in debt in the first place, you'll never pay off the credit cards.

Step 2: Sit down and figure out your monthly income and expenses. In the expenses column list things such as your mortgage/rent, electricity, food, minimums on the credit cards, etc. Also, its best to include a bit of "fun" money in your budget each month, even if its only $20. Does your income exceed your expenses? If your income is less than the expenses, you'll have to put together a plan to address that - either cut expenses or bring in more income, or both.

How much is the difference between the expense column and the income column? That is the extra money you have to put toward your debt.

Step 3: Now list the balance, minimum payment due and interest rates on all credit cards. There are 2 schools of thought on what order to pay your debts off and you will have to decide what works for you. The best way financially speaking is to pay the highest interest rate card off first. This method will pay the debts off fastest, as you will minimize the interest charges. The second method is to start with the smallest balance first and work your way up. This method helps with the mental battle as you get an early "victory" by paying of the small balances in a relatively short amount of time.

Whichever method you use, pay only minimums on the all but the card you are attacking first. On that card pay the minimum PLUS all the extra income you can. Once that card is paid off, move to the next highest interest or next lowest balance depending on your method. On this card you will pay its minimum (which you've always been paying) PLUS the minimum from the card you just paid off PLUS all your extra income. Keep up this snowball until all the debt is gone.

Step 4: Once you've paid off your debt, start paying yourself that money (or a good portion of it anyway) into a savings account to establish an emergency fund (3-6 months worth of expenses).

[poundwise]

Dave Ramsey, a radio personality/get-out-of-debt guru, has a seven step program:

The Baby Steps


You'll notice that the steps include a "debt snowball." That concept is explained here:

Debt Snowball Plan


And, finally, a user of Ramsey's system created a spreadsheet that can help with the snowball process:

Debt Snowball Calculator Worksheet


This is certainly not the only "step by step" program out there, however, as you seemed to be interested in a short, simple method that will work, this ought to fit the bill.

[puck36]

I have to agree with skydivingchic

1. Stop spending money

2. Get on a BUDGET

3. Pay off your debts. Like skydivingchic said there are 2 ways of doing this. What ever way you pick is up to you.

4. Save money 3-6 months worth of expenses

I'm not sure how much you make but you should be able to pay off your debts in 18-24 months. Some may take longer and others less time. I personal took 24 months because during that time I was only making $19,000 with $16,000 in debt.

[QuadSquadMom]

I see you have been advised well as above.

I'd like to add to the Dave Ramsey recommendation. His baby steps method offers what to do in very specific & clear steps. Its key to why he appeals to so many; very no-nonsense.

He has a FREE 14 minute online video lesson here: https://fpuonline.daveramsey.com/?ev...uOnlineJoinNow
It's lesson 1 of a series of classes called Financial Peace University. The freebie video alone will get you off to a great start. No email capture/registration to watch it either.

You can easily skip the books with Dave's plan, he also hosts a live radio show weekdays for free. Great way to keep up the momentum daily.

[QuadSquadMom]

I should add...

Before starting the Dave Ramsey baby steps, this is Baby Step 1A: If you are having trouble paying bills/falling behind, prioritize - cover what Dave calls "the four walls"

Food
Shelter/Utilities
Clothing (bottom-line basics only)
Transportation

Pay these first... before other bills....

Paying credit card bills while falling behind on house payments is not good.... it's bad prioritizing.

Baby Step 1 is get $1,000 in the bank as a "baby emergency fund". Do this quickly by taking on additional work, selling stuff on ebay, craigslist, yard sale, etc.

This thousand dollars is the cushion between your household and Murphy (of Murphy's law-what can go wrong, will... the ER visit, car repair, home repair, whatever would have normally pressured you to use a credit card or borrow somehow to cover it.

On another note, the online video lesson I listed above is like an into to Dave, why to save, & the consequences of not saving. The additional lessons outline the specifics of what to do & how to do them.

Also, rather than reading, Dave's book, The Total Money Makeover is available on audio book. Your library might have it. It contains the baby steps in detail.

[minnie1928]

I totally agree with all the advice already offered. We started Dave's plan about 2.5 years ago and have REALLY cut down our debt and refocussed our financial goals.

One little tidbit to add: when you get "found" money like a rebate, birthday gift or whatever, use it to pay down the debt you are focussing on. It's so easy to just take the cash and put it in your pocket, but it'll feel better if you actually do something productive with it. With today's options of bill paying over the internet, I think most credit cards will let you pay any amount at virtually any time. So take that $5 rebate, deposit it into your checking account and then make a $5 payment on that credit card. You'd be surprised how much little things like this add up!

Good luck!

[cleverusername]

I agree with everyone who recommended Dave Ramsey. His plan is simple and effective.

I also agree with the people who said to "stop spending", and in addition to this I think it's important to figure out WHY you spend so much. This was crucial for me to make progress (I started out with about the same amount of cc debt as you have). So often, chronic overspending is not only about enjoying a new item or keeping up appearances. There are usually deeper issues that need to be recognized.

[QuadSquadMom]

Originally Posted by cleverusername

it's important to figure out WHY you spend so much. This was crucial for me to make progress.

So often, chronic overspending is not only about enjoying a new item or keeping up appearances. There are usually deeper issues that need to be recognized.

That is so very true!!! The behavior must change if there is to be long-term success.

Taking a good look at one's self and really digging deep into the whys of what we do isn't always easy. It might even cause change or even a maturation process to take place . It did for me.

Dave talks about how loan consolidation gets people right back into a mess because they are essentially just "moving money around" - paying off the credit cards and other debt, only to turn around and use them again, without any real behavioral changes. Now they owe the consolidation loan and the newly recreated debt as well.

[dotcom]

Good plans guys!