Beginning the Debt Payoff Journey

5 Feb    Blogs

Well I have to say congratulations on the progress you are making.  The accomplishment of funding your first $1,000.00 for your beginning emergency fund is a big step.  By going through this process is going to demonstrate your determination and focus on your ultimate goal, becoming debt free except the mortgage (if you have one).

Now if, at the time of this post, you haven’t completed the building of your starter Emergency Fund quite yet, no worries.  Just keep focusing on that initial goal.  Once you have completed that step, just refer back to this post to move onto the attacking your debt process.

Now to begin with  I have updated the third table which displays the sample listing of debt.  I have removed the line item “Emergency Fund”.  This gave this person an extra $200.00 per month to attack his/her debt.  Here are the two tables to show that the line item has been removed and an extra $200.00 is left over after all of the initial expenses.

The above chart is the first with the Emergency Fund payment being allocated.  The chart below is updated since you have completed the beginning emergency fund of $1,000.00.  So I removed that line item and allocated its $200.00 towards the smallest debt balance owing.  You will also notice between the two charts that I have also updated the balances on each of the debt accounts, as well as re-ordered the accounts from the smallest balance to the highest balance..  The update is due to paying the minimum amounts to each of the accounts just to keep them current while establishing the emergency fund.  On the previous post entitled, Starting your Emergency Fund,  we calculated that just over 4.5 months would take care of it.  So I calculate five months of minimum payments going towards your debt.  But please keep in mind, I did not calculate the percentage rate being charged to each of the accounts.  I am for this example, just using straight dollar amounts.  However, loans, credit cards will have a percentage rate they tack on to your purchases each month you continue to have a balance.

So, if you remember back to the first step, once you had your finances organized and all payments directed to a specified account/expense, you had a remaining amount of $27.48.  So now that you have your beginning emergency fund established, take the $200.00 from that item and it’ll give you $227.48 now remaining.  So with this said, allocate this amount to the initial $35.00 minimum payment to Chase Credit Card.  You would now be making a monthly payment of $262.48.  But notice that your monthly total amount of your out going payments from your income remains the same.  It is now just being diversified to different accounts.  The reasoning for the allocation to the Chase Credit Card account is fairly simple, it is the smallest balance that you owe and will be paid in full the quickest.

 

So now that this person is entering his/her sixth month of working towards their debt free goal, you can now see a lot more clearly what it is going to take to pay your debt. Now you could simply roll over your monthly Chase payment towards your next in line, American Express Card plus its already allocated monthly minimum.  Then just continue with this momentum after each and every account is paid in full.  If you keep this up, you will be debt free sooner than you think and return to your Emergency Fund, but this time allocate all of the money you were putting towards your debt to your emergency fund.  The goal of the fully funded emergency fund is 10 months of your living expenses or in this case $23,635.40.

Now if you do need help on calculating your personal debt, especially the lines of credit and loans with interest rates attached, I have a special page with a debt calculator.  This calculator will give you information on a single debt account for the amount of time it’ll take you to payoff that account and how much of the money paid towards it went to interest, by plugging in the monthly minimums and then the option below to see how much additional dollars towards it would cut it down.  Click here to navigate to my debt calculator.

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