Eliminate Debt With The Rollover Formula

Credit card debt is easy to accumulate but often hard to pay. Many times, people fall into the “minimum trap” when paying their credit cards. Unless you’re using this tactic as part of you’re overall strategy (like below), just paying the minimum due on credit card bills will barely cover the interest you owe, to say nothing of the principal. It will take you years to pay off your balance, and  you could potentially end up spending thousands of dollars more than the original amount you charged. If you carry outstanding balances on two or more credit cards, the rollover formula can help you take charge and eliminate debt. Here’s how it works:

Step 1: Make a larger payment on the card with the highest interest rate and pay the minimum on the rest.

Step 2: Once this card is paid off, apply the amount of its payment to the minimum amount you were paying on the card with the second highest interest rate.

Step 3: When the second card is paid off, add that amount to the payment of the third card, etc. until you have paid off all of your credit cards.

5 Ways to Eliminate Debt & Take Control

1. Stop Borrowing from Your Future to Pay for the Present. Don’t use a credit card to pay for things if you can’t afford to pay off your monthly bill in full. There’s no faster way to fall into debt. Instead, put aside some cash each month for larger purchases such as a vacation, so you can pay for it in full. If there’s something you really want, but it’s expensive, save for it over a period of weeks or months before charging it so that you can pay the balance when it’s due and avoid interest charges.
2. Create a Spending Plan (aka “a budget”).  Most people spend thousands of dollars without much thought as to what they’re buying. A spending plan helps you see where your money is going each month and makes it easier to resist impulse buys and other nonessential purchases.
3. Expect the Unexpected. It’s tempting to reach for your credit cards when an unforeseen expense arises. However, it’s less stressful to save for it in the first place. Build a cash cushion worth 3-6 months of living expenses by saving a small, consistent amount each paycheck for your emergency fund. If you don’t have an emergency fund, a broken furnace or damaged car can seriously upset your finances.
4. Watch Where You Borrow. It may be convenient to borrow against your home or your 401(k) to pay off debt, but it can be dangerous. You could lose your home or fall short of your investing goals at retirement.
5. Get Help as Soon as You Need It. If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances. But there are also a lot of disreputable agencies out there. If you need a referral, I have worked with some good companies.

Paying Off Your Loans

Whether it’s a car loan or a student loan, it’s possible to pay back the amount you borrowed in a short amount of time. Just be sure to check the terms of your loan to ensure that you don’t have any penalties for early payoff.

How Loans Work. Most loan payments are calculated using compounding interest, which is the interest that is added to the principal of the loan each month that the balance is outstanding. You end up paying interest on top of interest. Although compounding interest is designed to work against you, you can pay off your loan three to four times faster with minimal additional cost to you just by knowing your “magic number.”

What’s Your Magic Number? The “magic number” is the portion of your monthly payment that goes towards principal. That’s it; no complicated math required. Pay your loan off quicker by doubling, tripling or quadrupling your principal, or “magic number” each month.

Don’t Be So Quick to Pay Down Your Mortgage

Don’t pour all your cash into paying off a mortgage if you have other debt. Mortgage loans tend to have lower interest rates and are the last debt you should pay off. Keep in mind that unlike other types of loans, you may deduct the interest you pay on the first $1 million of a mortgage loan. If you’re concerned about your mortgage rate and want to lower your monthly payments, consider contacting us to refinance.

The Bottom Line

Eliminating debt can seem overwhelming, but if you break it up into small steps, you’ll be on your way to being debt free in no time! If you’d like to share additional debt elimination techniques, post to our comments section.