New research debunks popular method of paying off debt

Originally posted by tovenar

I disagree, based solely on the psychology of getting out of debt.

When a family decides to get out of debt, you have to enforce austerity measures. Spouse and children are more accepting if you can tell them that it will get better in 6 or 9 months, because you'll be paying off a smaller loan--a used car you need for a second job, kitchen appliance, whatever.

Just try telling your spouse and children that you will need to devote all of your disposeable income for the the next FOUR YEARS to paying off a car loan a year early.

Be sure and tell us how that conversation went. Also, tell us how well your family kept to the new budget after 6 months, a year, 3 years, etc.

Family members, just like taxpayers, will put up with hardship for a limited period. But tell them that this is how it will be from now on, and watch them go on strike, refusing to do dishes, refusing to do homework, refusing to go to bed on time. Then they start stealing out of your change tray on the nightstand, because they know that you plan to deny them candy bars for the next four years. Then they start "borrowing" your debit card, and "forgetting to tell you" about the purchase they simply had to make for school, work, etc.

When you try to stop all surreptitious spending, watch them rebel completely, move out of their bedrooms and launch their own "Occupy Living Room" movement.

so much for family leadership.

Are you David Osbourne?Did you learn this from the Conservative Party?

Originally posted by Skorpiogurl
reply to post by haarvik

 

While you're taking the time to pay off the smallest one first, what do you tell your other creditors?

Good practice: Have at least six months worth of monthly expenses, including mortgage in your savings. Either that or get six months ahead on your important ones i.e., mortgage, car payments, utilities...

In my case, I told my other creditors the truth, I had no money to send them. Once I was able to start rolling funds from paid off debt into greater payments, I began to see rapid progress made on paying off all my debt. I am left with one credit card to finish and my car loan. From unemployed to over $20K paid in less than 4 years @ near minimum wage.

haarvik, the same idea, just slightly different implementation.

reply to post by Skorpiogurl


In order to do the HELOC, the first thing you have to do is own a home. That's a pretty big hurdle in the present economy.

reply to post by rogerstigers


That is how I set mine up, using excel I was easily able to see what plan would give me the best return on my payments with the fastest total payoff.

reply to post by Phage


You are correct again, with the exception of a little fiddle-faddling that is what my spreadsheet showed me. The part that I thought was the strangest was that, in my case, the account with the lowest amount happenned to have the highest interest rate, which made the rollover happen faster, which helped to cut the total time 'til payoff.

I chose to start my payments with the one with the highest interest rate (credit card) and the one with the highest amount (car).

Only way I got myself out of debt was living out of my car for a year and bust my a$$ looking for work most days.
Sometimes I'd hit the beach and just chill or go camping for a week.
It was actually a great experience. Very liberating.
Although I wouldn't recommend it. It's not for everyone and i'm probably lucky i didn't get arrested or stabbed to death but I just couldn't live in debt any longer... and that was only for 12g deep.
So I cant imagine the burden of someone who owes more than that.
I think at that if it got to a point like my friends (she's 50g in student loans), I think I would just say, "They just aint gonna get it back".
I think that's what most people think... I think?

credit scores are dumb if you ask me. They make it harder for someone with no credit to get credit and give them higher interest rates. Hence the credit system is not for us serfs and the rulers... well they just buy houses and cars and they even get discounts on them as well or receive them as gifts.

Thanks for this post. I know very little about financial options and after a recent job loss am struggling with debt. I have a new job but it pays about 10,000 a year less than my old one. The suggestions and recommendations here are very helpful to me and I will be looking into them for making a plan to get out of debt. Thank you to everyone here for sharing. S&F.

reply to post by haarvik


Agree totally. One little adjustment that may be made. I would only do this if the balances were not that much different or the same. $500 difference isn't that much, but a couple of thousand is.

Say your two lowest payments are $35/mo payment, $1,500 total, and 5% interest. Your second lowest is $40/mo payment, $2,000 total, and 18% interest. In this case, it would be better to payoff the $40/mo first due to the interest.

Another little trick, say after x number of months, your $35 minimum goes down to $30. You could pay the new minimum of $30, and add the difference of $5 to the $40/mo payment.

Other than that, I would stick with your snowball plan. Even if all your lower debt is at low interest rates, and your higher debts have large interest rates, people need to see results.

Originally posted by Skorpiogurl
reply to post by haarvik

 

While you're taking the time to pay off the smallest one first, what do you tell your other creditors?

Good practice: Have at least six months worth of monthly expenses, including mortgage in your savings. Either that or get six months ahead on your important ones i.e., mortgage, car payments, utilities...

To be able to do what Haarvik is suggesting, you have to make at least the minimum payments on all of your credit. This assumes you don't have more debt than money coming in. The more money you can add to the debt you are concentrating on getting rid of the faster the snowball effect will happen, which means the faster your debt will disappear.

reply to post by Mystery_Lady

Other than that, I would stick with your snowball plan. Even if all your lower debt is at low interest rates, and your higher debts have large interest rates, people need to see results.

Not all people. I would argue that seeing the balance on a high interest loan decline constitutes seeing results. But is it worth potentially thousands of dollars in interest (which could instead be used against the very debt which is producing it) for the instant gratification of seeing results in the form of a low balance account going away?
www.abovetopsecret.com...

In many cases that need for such gratification is what leads to the accumulation of debt in the first place.

Originally posted by getreadyalready
To be really savvy, you should pay off the lowest interest rates first. As soon as you do, they inevitably send you those balance transfer checks, because they don't want your account sitting there empty.

Just make sure the balance transfers are the same rate. I know some companies have a higher interest rates for balance transfers.

reply to post by ClanDonnachaidh


I'm an American. Do you think my viewpoint is correct, or wrong? I'm just curios and I couldn't tell the implications from your question.

All the best.

reply to post by Phage


Right. But you're not making one monthly payment, you're paying them weekly.

Borrowers making extra payments do better with a standard mortgage or HELOC. Most lenders will credit extra payments received within the first 20-25 days of the month against the balance at the end of the preceding month. A borrower who pays $1,000 extra on day 20, for example, will save the interest on that $1,000 for 20 days. With a simple interest mortgage, in contrast, interest accrues for those 20 days. In other words, by sending extra, the daily accrual is reduced.

The interest on the original debts do not roll over and you're saving even more if you're rolling high interest credit cards into a low interest first or second mortgage.

I would say the only plan that truly works is to not get into debt in the first place

No bank account, plus no credit cards, plus no loans, equals no damned debt.

It's worked for my 29 years on this Earth, and I don't plan on changing it up.

Tackling the highest interest rate is a no brainer.

reply to post by unityemissions


Well there you go

reply to post by Phage

In many cases that need for such gratification is what leads to the accumulation of debt in the first place.

Exactly! For most people I know this is just a bad cycle of creating/eliminating debt.