9 Steps to Get Out of Debt - Part 5
Step 5 - Freeing Up Income
You were warned in the first article of this series that paying
off your debt was going to require some work and sacrifice.
That's what this article is all about. Learning how to reduce
the amount of interest you are paying on your debt in step 4 is
a great start. If you haven't done so already, I'd suggest
recalculating the total cost of your debt with the reduced
interest. You should already be seeing a pretty big difference
and that will help to give you the motivation you'll need for
this step.
If you're serious about getting out of debt, which I'll assume
you are if you've made it this far, it's going to take more than
just reducing interest. It's going to take making extra
payments. To do this, you're going to need some extra money.
I'll just tell you now, I don't have a magic solution for this
one; it's going to take some work. I think I can offer you a few
tips to make it easier.
Before we get into the how, let me explain why this is so
important. Using the amortization tool from step 3 you can see
that if you have a 30-year, $100,000 mortgage at 6% interest,
your monthly payments are right around $600. The first year,
about $100 of that is going toward paying off the principal
amount owed and $500 is going towards paying off the interest.
That means that by making just one extra $100 payment, you can
in effect shorten the length of your loan by one month, saving
you $600. The more often you can do this, especially towards the
beginning of a loan, the more you'll save. The further you get
into a loan, the more principal and less interest you pay each
month, so it has less of an impact later in the loan. The
principle is the same with other types of loans, not just
mortgages.
If you're like most people, you're already living beyond your
means and don't have an extra $100 a month to pay make extra
payments. There are options, though. The first and most obvious
option is to work more. If you have a job where you are paid by
the hour, then see if it would be possible to work some extra
hours. You could also consider the possibility of working a
second, part-time job. Even putting in just 5-10 extra hours a
week can help a lot. You could also go to a day-labor place to
pick up work for one Saturday each month.
If working extra hours not your thing, or you're just unable to,
don't worry; there are other options. One is to come up with
some one-time income, by selling some items. Making a large
one-time payment will help reduce your monthly interest fees,
helping you to pay off your loans much quicker. You can hold a
garage sale, eBay some items, sell an old stereo to a buddy,
whatever it takes. Almost everyone has something they're not
using any more that they could sell to help pay off some debt.
The last suggestion I have for you on how to come up with some
extra money to pay off your debts faster is to spend less. First
off, cut out all impulse buying and buying any other
entertainment items that you don't need. Perhaps you can do
without cable TV, or high-speed Internet. Or you could keep your
home slightly warmer in the summer to reduce the electric bill.
You could eat out less often, not buy unnecessary items or buy
generic brands. At one point in your life, you have probably
gotten by with less money than you have now, and you can do it
again. It may just require being a little creative.
In the next section, I'll show you how to use this extra money
to begin paying off your debt in the most efficient manner.