How to Amortize a Debt

Amortizing debt simply means to pay off a debt by making regularly installed payments; the word itself is derived from Middle English (amortisen) which means, to kill.

To amortize a debt, you need to calculate the principal, interest and the period of time over which the amount owed is paid. Setting an amortization schedule is essential in determining the period of time and the periodic payment rate. This can be accomplished with a simple formula, coupled with disciplined money management.

Instructions

How to Amortize a Debt

1

Calculate the periodic payment (monthly payment) by entering the principal, interest rate (and loan period if applicable) into an amortization calculator or by using an advanced function financial calculator.

Monthly interest can be calculated by multiplying the principal (P) with the interest rate (R); while the periodic payment (M) can be calculated by taking the principal (P), the interest rate (R) and the number of months in the loan period (N) using following formula M = PR / [1-1](1 + R)N]

2

Set a budget by listing all monthly expenses, then prioritize them in order of importance (rent/mortgage should be first, followed by utilities and insurance); the last items to list are discretionary, such as dining out and luxury items. Break the list into two categories: fixed expenses (such as mortgage/rent) and variable expenses (such as groceries and utilities).

3

Set a goal for the debt amortization after setting a budget. Concurrently, curtail discretionary spending (especially impulse buying) and focus on the debt. List all debts from smallest to largest and concentrate on the smallest first, then move on the next. To avoid fees or disrupting the amortization schedule, do not miss payments .