Financial Tips | Debt Management

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How to Create a Debt Elimination Plan

Getting out of debt is the quickest way to becoming financially secure. It is important to note that not all debt is bad. There is such a thing as good debt. Good debt is debt that makes you money. For example, a real estate development loan from which you can collect rents as a result of a commercial development is good debt. Therefore, your debt elimination plan should focus on your bad debt. Bad debt is debt that costs you money. An example of bad debt is credit card debt. Another common bad debt is a car loan. Cars depreciate in value and thus, taking out a loan to buy a car will cost you money.

Eliminating your bad debt is important should you want to achieve financial security. The most important thing that you have to realize is that, absent you winning the lottery or inheriting a large sum of money, your bad debt is not going to disappear overnight. Therefore, getting out of debt is a process. The point is, however, should you stick to an economically feasible plan, you will start to notice a drastic decrease in your overall debt. Therefore, you will pay less in interest payments and thus, will save money on your debt.

A very common mistake that people make when enacting a debt elimination plan is that they continue to accumulate debt while trying to pay off the same. The debt payments that you make and the debt reduction techniques that you enact will be for not if you continue to offset these advances by accumulating more debt. You cannot reduce your debt and create more at the same time. Therefore, if your debt elimination plan does not include a plan to prevent the accumulation of debt, your debt elimination plan will be useless.

In order to have an effective debt elimination plan, you have to pay off the highest interest debt first. Your highest interest debt will most likely be your credit cards. Therefore, you need to pay off your credit cards first in order to get out of debt more quickly and to decrease the amount of money that you waste on interest payments. This is not to say that you should refrain from paying your other debts during this time. Put simply, you have to contribute more of your payment dollars to the higher interest items. Therefore, for example, should you have $100 per month to pay of your debts and one debt has a 22% interest rate and another debt has a 7% interest rate, you should pay a certain percent to each debt, the higher one to the 22% interest rate (for example, you might want to pay 80% to the 22% interest rate (which would be $80) and 20% to the 7% interest rate (which would be $20) so that you can pay off the higher interest debt sooner).

Focus on your bad debt, be patient, refrain from accumulating debt while paying off your existing debt, and pay the higher interest rate debt first. Doing this will insure that your debt elimination plan is a success.