If you are looking for a way out of debt, there is some good news and some bad news. You can find that there are about as many methods to get out of debt as there ways to get into debt, so there is not a lack of strategies to try. The bad news is that not all the strategies presented actually work. Whatever plan you decide to implement, one thing is certain -- don't deviate from the course until you have met your financial goals.
Power Payment Strategy
Debt can be an overwhelming burden to live with but, with proper techniques, it can be controlled and eliminated. One strategy, according to the University of Wisconsin, is utilizing the "power payment" method. The temptation, when looking at debt, especially credit or department store card debt, is to pay the minimum or maybe just a few dollars more, if your budget allows. In the "power payment" method, you would make a "power" payment above the minimum and continually apply this payment for the life of the debt, no matter how much the minimum decreases. The math on this method is flawless. According to the University of Wisconsin, you can shave nearly 15 years off a $3,200 credit card bill with 14.9 percent interest charge using the power payment method compared to paying the minimum. The extra payment cuts the principal down, thereby lessening the impact of the interest accrued over time.
Utiizing the Power Payment Strategy
While the "power payment" strategy for paying debt set forth by the University of Wisconsin is sound mathematically and logically, you have to work at maintaining this plan. To make this strategy work, you need to compile all your debt. List all the minimum payments and then determine how that total number fits with your family's budget. Decide which card you want to target, how much over the minimum you can afford to pay, and continue paying the minimum on the rest. You cannot blink when utilizing this strategy. As the minimum payment goes down over the course of several months, the temptation is to ease up on the power payments, but that strategy can derail the plan quickly. Instead, you need to find the discipline and room in your budget to keep the strategy going long term.
Debt Snowball Strategy
The "debt snowball" strategy, courtesy of Christian financial counselor Dave Ramsey, is similar in many ways to the "power payment" strategy presented by the University of Wisconsin but with a different take. Ramsey recommends choosing your smallest debt first, regardless of interest rate. Choose a payment above the minimum, and then attack the smallest debt while paying the minimum balance on the rest. According to Dave Ramsey, this method is successful since paying off small debts provides you with a sense of accomplishment and you are more likely to stick with the program. After you have paid off that debt, you add the payment on the first debt to the minimum on the next debt in line and apply until all debts have been removed.
Utilizing Debt Snowball Strategy
Like the University of Wisconsin debt reduction strategy of the "power payment," the snowball strategy makes use of a sound mathematical formula and must be played out with discipline and precision. Budgeting, again, is a key to success. You need to know how much you can spend and you need to stick to the plan. Once you have paid off a bill, the temptation is to relax and not spend that money on bringing down debt. This plan also requires perseverance, especially when you begin tackling your largest debt. In the first few months, paying down the extra principal may seem a fruitless endeavor as the balance seems to not move at all but, over time, as interest stops accruing as fast, even the largest balances will tumble. However, this method takes time and courage to make it work.
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