Well, you’ve overspent, and now you find yourself dealing with the consequences of the debt you have accrued. But hey, you’ve matured and you’re ready to move on and scale that mountain of debt before you are buried under it – which is a very real possibility, depending on your age.

Since rampant debt and the subsequent repayment can ruin lives, we thought we would take a look at some debt management strategies to help you get a handle on your debt.

Make Minimum Payments

This is the debt management strategy that the credit card companies and banks want you to take and it is one of the most popular today, unfortunately. You make the minimum payment on all of your accounts each month, and eventually, at some nebulous point in the distant future you will pay them off.

It takes THIRTY YEARS or more to pay off a credit card making only minimum payments. That’s because monthly payments are determined as a percentage of the outstanding balance, typically between two and three percent. As you slowly pay down your balance, the minimum keeps going down and you pay less and less of your balance each month which keeps you paying interest for years to come. A good bit of business for the credit card companies but a bad idea for you. Really bad.

Debt Snowball

With the debt snowball method, you make a list of all your debts and order them from highest balance to lowest balance. Then you make minimum payments on all of them except one. On that balance you throw every bit of spare cash you have, above and beyond the minimum payment.

Once you pay it off, you move on to the next debt on the list and keep paying extra on it until it is gone. The key here is to not absorb the payments you were making on the now paid off balance into your living expenses. Turn around and apply all that money to the next debt and whack it into submission.

What makes the snowball so powerful is that your amount of money available to pay down your debts increases as your total debt load goes down.

There are three ways to decide which debt to pay off first.

1. Interest Rate. By choosing to pay off the highest interest rate debt first, you will save money in the long run by not paying all of that interest while you pay off other, lower interest rate accounts first.
2. Balance Due. Many people choose to pay off the smallest balance first, because it proves that they really can do it, and it is easier to pay off $1000 than $10000.
3. Emotional Satisfaction. Some of you just have it, a debt that makes you irrationally mad. Maybe you guaranteed a card for an ex, and now you are stuck making the payments. Whatever the reason, paying off this debt first would give you a big mental boost, so do it.

Slow and Steady

Make a list of all your debt and the current minimum payment. Using this method you will make the same monthly payment as you are on the day you make your list. As we said before, minimum payments go down in proportion to your balance, with the ultimate goal of keeping you paying interest for a lifetime.

By continuing to make the same payment each month you will pay off your debt in seven or eight years, ten max.

Emergency Fund

All debt management coaches and plans will prescribe saving an emergency fund before you begin trying to repay your debt. Save at a minimum $1000 and keep it for real emergencies, not just a sale at the local clothing store.  Some people recommend saving up to one full month’s expenses.

Having an emergency fund will let you pay for things in cash, without relying on a credit card, which provides a tremendous boost to your debt paying psyche.

Emergency funds make for a good management tool even when you aren’t in debt. Try building up a fund of easily accessible money that is equal to six month’s salary. This will allow you plenty of freedom and the ability to meet almost any emergency head on and pay with cash.

Irregular Expense Fund

Similar to an emergency fund, this is an account where you save money for expenses that aren’t monthly. For example you could create a tire fund and place money in it to prepare for purchasing a new set. Car and home maintenance are other examples of categories that you could include in your irregular expense fund.

The key here it to estimate how much you will need for the year and save until you reach that amount. As you dip into the irregular expense fund, pay it back until it is replenished.

Closing Thoughts

Most people combine elements, either an emergency fund with the slow and steady approach or an irregular expense fund and emergency fund coupled with a debt snowball. The choice is yours to make, and one way or the other won’t make a huge difference as long as you decide on a strategy, implement it and carry it out.

Photo by me and the sysop

Related posts:

1. How To Tackle Credit Card Debt
2. 8 Things You Need to Know About Payday Loans
3. The Awesome Power of Compound Interest
4. Do It Yourself Debt Negotiation
5. 10 Steps To Avoid Bankruptcy