Calculating how you can eliminate debt can be an effective way to create a debt elimination goal for yourself. To begin this process, you'll need to collect data on all of your debt balances, the interest rates on those debts, and the monthly minimum payments. From there, you can determine how much you can afford on your debts, how long before you can pay off your debts, or set a goal on when you would like to be debt-free.
Minimum Payments Only Calculations
Making only the minimum payments on credit cards or department store cards is a sure-fire way to keep your debt prolonged, perhaps past your own lifetime. Paying the minimum balance is akin to running in place. By paying just the calculation your creditor provides, you'll be paying just a small amount of equity and a large amount of interest. Generally, most creditors allow for a 70/30 mix of interest/equity paid. Using this method, you could run a large balance the length of two or three decades, or more, depending on your balance and interest rate.
Fixed Rate Calculations
A fixed-rate calculation is an effective method to begin truly paying down debt. With a fixed rate, you determine how much you can afford to pay a month and you apply that payment to the bill, no matter the minimum payment. Over time, as you pay down equity, you will see the minimum payment become reduced dramatically. The key to success of this plan is to maintain your fixed rate even as the temptation to pay only the minimum payment rises. You can pay off a typical debt five or six times faster than you would paying the minimum balance only.
Debt-Free Deadline Calculations
Setting your own deadline to become debt-free might be satisfying in the short term, but could cause you some frustration in the end. If you are looking to set a debt-free deadline, be realistic in your expectations and do not project more payment than you can afford to make. Look at your monthly costs and fit the deadline within those parameters. By creating a debt-free deadline, you can give yourself some extra motivation to put aside the money you need each month to meet your goal and you can begin to see progress in a sometimes frustrating situation.
Snowball Debt Elimination Calculations
The snowball debt elimination method calculates your savings based on a simple tactic -- paying off the debt with the highest interest rate first, then you can start applying those payments to the next debt on your list. You can see, with this method, how you can save money on interest and how you can shorten the timeline you'll need to pay off your debts. You can also adjust this plan by paying off the smallest debts first, rather than those with the highest interest rates. Mathematically, you may not save as much money, but, psychologically, you can earn small victories and feel good about your debt elimination plan.
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