A word that seems to correspond with the current recession is "weight." There is the weight of worrying about losing a job, how to pay bills, and how to plan for an uncertain future. Americans spend around 14.3 percent of their income attempting to pay off debts, according to Time Magazine. A significant percentage of those payments go to interest, rather than whittling away at actual debt. There are ways, though, for Americans to take charge of paying off those debts.
Use Savings
The idea of using savings to pay debt is a scary feeling. What if the car breaks down or you have to make an emergency trip? Think about it, though. When the interest on your debt is at 12 percent, your savings and investments would have to be earning an 18 percent return before federal and state taxes just to break even with what you're paying on your debt. Paying a higher interest rate than 12 percent on debt? That makes the use of savings and investments an even better idea to pay it down or off.
Get In Front Of The Minimum
Somehow, break the habit of paying the minimum to your creditors each month. Paying the minimum is exactly what they want you to do. The longer you take to repay the principal, the more interest they earn and the less cash you have. If you don't already do so, shop in discount stores to help put a few extra dollars away each month. Have a garage sale to get rid of old junk that will put cash in your pocket. Be creative in finding ways to come up with extra funds toward your monthly payment.
Use The Snowball Plan
The principle of the snowball plan is to focus on one debt at a time. You'll continue to make the minimum payments on all other debt. Financial adviser Dave Ramsey instructs his clients to accumulate $1,000 cash as an emergency fund before beginning the plan. The snowball plan instructs debtors to list their debts in order, with the smallest payoff amount listed first. You're not to be concerned with interest rates or terms unless two of your debts have a similar payoff amount. In that case, list the debt with the higher interest rate first.
Remember, you'll continue to pay the minimum payment toward every debt while you're concentrating on the debt at the top of your list. Focus on that debt, adding extra to your payments when you're able. As soon as you've paid that debt off, you'll focus on the next debt on the list. The next debt will have an advantage. In addition to your regular payment to them, you'll add in the amount of money you customarily paid toward the first debt, paying the new debt off more rapidly. Once that debt has been satisfied, you'll look at the next debt on your list and begin the process over. Only this time, you'll have funds from the two previous debts to pay toward the third. As the name indicates, the snowball plan builds momentum as it progresses.
Borrow From 401(K)
Another option of paying off debt is to borrow from your retirement account. If you participate in a 401(K) retirement plan at work there is a chance that you can borrow up to 50 percent of the account's value, or $50,000, whichever amount is smaller. The interest rate is usually a point or two above prime, making it cheaper than interest rates found on standard credit cards.When you do pay back the loan to your 401(K), you're actually paying yourself, as the interest as it goes right back into your account.
Borrow From Family
As hesitant as most of us are to choose this option, borrowing money from friends and family is another way to pay off debt to a high-interest creditor. Remember, though, that you must repay whomever was kind enough to loan you money. There is nothing like an unpaid debt to ruin a relationship.
Borrow Against Life Insurance
Some life insurance policies have a cash value. If that describes your life insurance policy, consider borrowing against it to repay your debt. One important caveat: if you don't repay the insurance policy, it may be worthless in the event of your untimely death, leaving your loved ones with another financial burden.
Work With Creditors
Be honest with your creditors if you're having trouble making regular payments. Tell them that if you're unable to renegotiate the terms of your loan you may have no other course than to file for bankruptcy. Be polite as you ask for a new and lower repayment plan and a lower interest rate. A creditor who knows that you may file for bankruptcy is likely to want to protect against a total loss.
Bankruptcy
If all else fails, consider speaking with a bankruptcy attorney. She can tell you what your options are and give you a realistic picture of how bankruptcy might impact your financial future.
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