Before you can build a plan to get completely out of debt, you need to have your debt under control. You must be able to make all of the required payments every month without borrowing on your credit cards in order to create and execute a meaningful plan to get completely out of debt.
If you aren’t ready, consider selling some assets to reduce your debt to the point that you are in control. Then, you can follow these five steps to build a plan to get completely free of debt!
1. Make a list of all of your debts, ranked in order of size — listing the smallest first.
2. Tally up the total of all required payments. Add about 1 percent of your monthly income to that number. That extra bit of money we’ll call your Power Payment.
3. Each month make all of the required payments on your loans and then add the Power Payment to your smallest loan. With the benefit of your Power Payment, your smallest loan will be eliminated quickly, perhaps in less than one year.
4. With one loan paid off, add the amount that you originally had to pay on that loan to your monthly Power Payment. It’s even bigger and more powerful now!
5. Keep paying your bills every month, applying the Power Payment to whichever loan is the smallest until it is paid off entirely. Then, add the original payments from the paid off loans to the Power Payment so that it keeps growing bigger until all your loans are paid.
Following this plan will allow most people to be totally debt free, including free from a mortgage, within ten to fifteen years.
Over the years, as you follow this pattern, remembering not to get into any new debt, most people under fifty can expect to see their incomes grow modestly over time, allowing you to improve your lifestyle even while you are focused on eliminating debt. People over the age of fifty tend to see slower increases in income but may be experiencing reductions in expenses as children leave the nest.
The sooner you choose to get out of debt, the better. If you think it is miserable having to devote so much of your income to debt payments now, imagine how liberating it will be to have no debt. What would you do if your home and cars were fully paid off and you owed no one anything?
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.