How to Get Out of Debt

Americans carry far too much debt. Being up to your eyeballs in debt is so common, some almost consider it a right of passage into adulthood. Between credit cards, student loans, auto loans, pay check advances, etc. this country has become a debtor society - and that is to say nothing of mortgages!

In this essay I will attempt to cover one of the best methods I know to get out of debt. This method is most simply known as "Over Payment". This simple, yet powerful tool will help you to slaughter your debt and regain control of your finances.

"Ugh, Gai, I've already heard of this method. Don't you have something new?"

The best techniques are the ones that have stood the test of time. And given that you're reading this, I can safely assume that you haven't cleared out your debt. So try to keep an open mind and you might pick up something new along the way. Now, for those of you who have not heard of the "Over Payment" method, it means that you simply pay more than your monthly minimum on your debt with the lowest balance while simultaneously paying ONLY the minimum on your other debts.

Before we get into the nuts and bolts of this powerful technique, I highly advise that you read my other essay on money management titled "How to Save Money, Painlessly!" In that essay, I describe how you can automatically spend less and save more and unless you're already very disciplined with your money, you will be setting yourself up for failure by trying to dive into debt elimination without gaining control over your day to day spending.

Once again, I highly recommend that you do not attempt to eliminate your debt as described in this essay before you start to increase your savings as I talked about in the other.

Ok, so let's talk about the "Over Payment" method and how you can employ it to your greatest advantage. After having read my other essay "How to Save Money, Painlessly!!!" you already know that you make more than enough money to get out of debt; now all you need is a little head start. So with your household budget already in hand here are the steps you should use to kill off your debt:

1. Assemble all of your most recent debt statements.

These are your credit cards, auto loans, student loans, mortgage statement, etc. When you have all of these in front of you, determine which one has the lowest balance and highest interest rate.

2. Determine the minimum monthly payments required.

This is NOT as simple as looking at the 'Payment Due' line of your bill. Finding this out is sometimes a little tricky, especially for credit cards because you can sometimes find that the minimum due is LESS than the interest accrued. Credit card companies employ this method for the simple reason that they know that most people pay only the minimum balance just to get by until the next month. Because of this, it is your responsibility in this step to make sure you know exactly how much each of your debts accrue in interest on top of your principle (borrowed amount). So what you have to do is to call each of your lenders and ask, "How much interest do I accrue in a month on top of what I have to pay on the principle?" This will let you know how much you have to pay on all your other debts.

3. Take your smallest debt and "Over Pay" that until completion.

Let's say your smallest debt is a Visa credit card, and your monthly minimum payment is $50.00, then you should be making payments over and above that minimum, as high as you comfortably can. The greater the Over Payment, the faster you will pay it off. And don't worry about your other debts for now; since you are paying the monthly minimum, all those creditors can do is shut up and count their pennies.

4. Reward yourself.

So now that you've stuck steadfastly to your Over Paying strategy you now find yourself free of your first debt! It's gone! Dead! Never to bother you again! At this point I always reward myself with something nice. And here is the important part: I reward myself with something that can be bought with what I was spending on that monthly payment. So if I was spending $100 on my Visa card, then I reward myself with something that can be bought with $100 or less (do NOT buy something that has to be paid for with more borrowing!!!). I do this because rewards have been psychologically proven to encourage repeat behavior; and paying off my debts something I want to repeat again and again.

5. Over Pay your next debt.

By now you have paid off your smallest debt and you now find yourself not hurting so much for money. Nice feeling huh? Now you can stick that money back into your disposable income right? WRONG! You take that payment and slap it right on top of your next smallest debt. So if your next smallest, after the newly paid off Visa card, debt is a MasterCard which carried a monthly minimum of $75 and you were paying $100 on that Visa, then guess how much you should now be putting on your MasterCard? Yep, $175! Sounds pretty simple, huh? I told it wasn't that complicated.

Once you have paid off this debt, continue to move up your debt ladder and you'll have your debt cleared off in far less time than you thought possible.

I'd like to include a couple of notable caveats of the debt Over Payment strategy. First, I'd like to encourage prudent caution when trying to Over Pay your mortgage or car. Now a days many large loans come with "pre-payment penalties". Banks include these in mortgage contracts to protect their earned profit from the interest of the loan. So before you attempt to start pre-paying items like auto loans or mortgages, make sure of 2 things:

1. That you do not have any kind of pre-payment penalty written into the loan contract.

2. (And this one is important) You inform your lender that the Over Payments are to be applied to the principle of the loan, NOT future interest.

The other caveat is regarding student loans. Of all possible forms of non-equity earning debt, I like student loans the best. Not only are they nearly always at single digit interest rates, but they have very flexible repayment plans and you can often defer payments if you feel you don't make enough money to pay for them on top of all your other bills. Now, whether or not that deferment accrues further interest is determined by whether the loan is subsidized or unsubsidized, but even if it is not, deferment can be a terrific option if you find yourself in dire straights.

So that's it! Paying off your lenders is just a simple process of attacking this huge problem, one dollar and one debt at a time.