July 27, 2009


While the current economy has admittedly impacted people differently, one common theme has been that getting out of debt is now "in vogue." It used to be that insomniacs were the ones bombarded with all of the get out of debt "goodies" during late night TV ads; with the economic downturn, debt elimination ads now seemingly target everyone ... Debt negotiation, Foreclosure relief, Debt settlement, Bankruptcy relief, Credit repair ... the list goes on and on. Rather than focusing on the legitimacy (or lack of) with many of these types of services (which I've done in previous tips), my objective this week is to focus on debt management strategies that you can put to practice quickly, easily, and on your own.

Ultimately, most efforts aimed at eliminating debt can be summed up in two primary goals: (1) Time (getting out of debt as quickly as possible); and (2) Saving Money (paying as little in interest as possible). While there are numerous ways to work on these goals, I want to focus on just a couple simple steps that can be taken that will provide dramatic results.

Think of this as the anti-credit card payment ... credit card companies allow you to reduce your required payment as your balance decreases. A level payment suggests that you pay your current monthly payment (whatever that is) steadily until the debt is paid off.

Balance of $5,000; Minimum payment of $150; 15% interest
(Payment = 3% of balance --decreasing with $10 minimum)
REPAYMENT = 16 years 5 months, $3,400+ in interest paid

Balance of $5,000; Level payment of $150; 15% interest
(Payment of $150 until debt is completely repaid)
REPAYMENT = 3 years 8 months, $1,500 in interest paid

2. 'Power Payments'.
PowerPay, a systematic way of repaying debts that was developed over 15 years ago by Utah State University Extension. I've since heard this system of debt reduction commonly referred to as a "snowball method" of repaying debt.

PowerPay Assumption #1 - Make level payments on all debts
PowerPay Assumption #2 - Accumulate no new debts
PowerPay Assumption #3 - As one debt is paid off, that money is used to roll over to a new debt; that 'cycle' is continued until the debt "snowball" is ultimately focused on paying down the final debt.

A benefit of this program is the flexibility for you to decide how to apply the extra payments (as debts are paid off) ... should you pay the highest interest rate (to save the most money)? Or should you pay off the lowest balance which may enable you to "stick with" your debt reduction plan better (ala weight loss)? You may want to review my debt elimination post from a while ago where I addressed these issues.

The time and money saved using this system of repayment is often breathtaking. Utah State has made their PowerPay calculator available for free on their website - https://powerpay.org.

Take a look at how much time and money you could save by implementing a couple of simple debt reduction strategies that don't require assistance from others or cost you a dime!