Handling Your Debt

by William Blake

The first step to handling any problem, and excessive debt is no exception, is to focus on facts. Here, that means finding out how much you actually owe and what the monthly payments and interest costs.

It’s surprising, though maybe it shouldn’t be, how many people that are troubled by debt problems, don’t actually know how much monthly interest they’re paying. Part of the problem may be that they really don’t want to know. Considering how much it sometimes is, one can hardly blame them.

But the first step back to financial health is a good diagnosis. If you’re paying $200 per month in interest charges alone on a monthly net income, say, of $4,000, then you are paying 5% PER MONTH of your income for essentially nothing. It’s not entirely nothing, since you are enjoying the things you bought early. You would have had to save to purchase them outright. But is that worth 5% of your income?

When that $200 a month (and for many, it’s much more) becomes the total you can pay each month, you have reached a point where you will never pay off the debt. If all the money is going to interest none is going to principle. That may be an extreme case, but consider how much of the monthly payment in your circumstances goes for interest versus repayment of principle.

In the case of your average mortgage, for many years about 90% of your monthly payment goes to interest. You can go on line and calculate how long that will take in your case to pay off.

For example, if you borrowed $10,000 and your interest rate was 7%. It would take 10 years to pay that off making payments of $116 per month. You will have paid close to 40% of the original amount of the loan in interest, almost $4,000.

After analyzing your situation it is time to make a budget. Try using the “snowball method” to pay off your lowest bills first and work your way up to the higher balances. Try to make the highest payment you can to pay things off as quickly as possible.

Alternatively you could pay down the largest bill. That would save you the most in interest charges, but it’s hard for many people to stick to it, when they see such slow progress.

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