Tuesday, May 13, 2008

How Shall I Delete My Debt?

Okay, so I began looking into different ways to attack the debt that I have. Here is what I came up with...
My budget is set up in three sections: Fixed debt, bills, and monthly spending. For the first two categories, I have a set amount that I will use every month to pay everything that is higher than the total of all of the bills should be. So, if my number is $2.700 a month, and my bills come out to be $2,450, I take the remaining $150 and apply it to the debt I am trying to get rid of first. Hence, I don't really have a set amount of extra money that I can definitely put into debts every month, but there is always extra.

So, this leads me to which debt paydown strategy I should use. There are three main schools of thought on this one and they are pretty widely known.

The first is the one that Dave Ramsey suggests: Lining up all of your debt from the smallest amount to the largest, then paying it off and using the money you would have used on your paid-off debts and applying it to the next debt on the list. This is known as a debt snowball. This is mainly accepted due to the pyschological benefits of closing out accounts as you go, but it usually costs you more in time and interest.

The second is championed by Suze Orman and it goes: Lining up your debts with the highest ineterest rates on top. From here, it works the same way. You pay one off and apply the money to the next. This plan makes the most sense financially as it will save money in interest charges.

The third is based on Mary Hunt's "Rapid Debt Repayment Plan". You can follow the link and figure it out for yourself. It works out about the same as the first plan but it requires more figuring to get it right.
So, I put my debt numbers into a debt paydown calculator along with an added monthly payment of $400 and came up with these two outcomes based on the first two options:

The first option would save me 71 payments and $6,662.55 in interest.
The second option would save me 72 payments and $7,340.13 in interest.
Logic dictates that I go with the second, but I might be one of those who needs the emotional lift of getting cards paid off. Plus, the first two cards I would have to pay off in the second plan equal almost $15,000 and that could take a LONG time.
Any thoughts?

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