« The Goodnight Thing | Main | Easter Activities and Games »
Debt Reduction Strategies
By Polly | March 10, 2008
For many families battling debt is a problem. From braces, to daycare, to family vacations, families every day are struggling to keep up financially and are relying more and more on credit cards to help pay the bills. According to money-zine.com, the average family carried a balance of $8,500 in credit card debt in 2007. With a current average variable rate of 12.89% (source bankrate.com) and an average payment of $212.50 (2.5%), it will take a family approximately 53 months or about 4 ½ years to pay off this debt.
So what’s a family who is faced with a lot of debt to do? Here are some common debt reduction strategies to help you get started.
Pay the Highest Rate First - List all of your family debt (credit cards, auto loans, personal loans) on a piece of paper with each debt’s balance, minimum payment, and interest rate. Sort the debt from highest interest rate to lowest interest rate and start tackling the debt with the highest rate first. Throw as much money as you can at the debt with the highest interest rate while making only the minimum payments on all the other debt. Once the highest interest rate is paid off, move onto the next highest rate paying as much as you can while continuing to pay the minimums on all the other debt.
The Debt Snowball approach is a debt reduction strategy advocated by Dave Ramsey in Total Money Makeover. In this strategy, you begin by listing all of your family debt just like in the first strategy, but rather than starting with the debt with the highest rate you start with the debt with the lowest balance. You throw everything you have at the debt with the lowest balance while continuing to make payments on all of the other debts. Once the first debt is paid off you take the payment you were making on it, roll or snowball it into the minimum payment on the next debt until the next debt is paid off. You continue this snowball approach, each time making your payment bigger and bigger, as you roll your payments together until all the debt is paid off. The philosophy behind this debt reduction strategy is more psychological in that people need the psychological win of actually paying off a debt to continue. By paying off the debt with the smallest balance, families realize a quick win and thus have motivation to continue tackling the remaining debt.
Dead on Last Payment (DOLP) - In the book Start Late, Finish Rich, author David Bach advocates the DOLP debt reduction strategy for families. In this method he advocates using a DOLP factor to determine how to pay off your debt. Begin by listing all of your debt along with each debt’s balance and minimum payment. Divide the balance on each debt by the minimum payment to calculate a DOLP score - or Dead on Last Payment. Rank the debt from lowest to highest DOLP score and begin tackling the debt with the lowest DOLP score first. Throw any extra money you have at this debt while continuing to make the minimum payments on all the other debt. When the first debt is paid off, move onto the debt with the next highest DOLP score.
Related Entries:
11 Quick and Easy Things You Can Do Right Now to Organize Your Personal Finances
More than 30 Days of Night - Top Tips for Avoiding the Debt Vampires this Christmas
Back to School Strategies and Printables
I’m a Little Afraid
5 Things You Didn’t Know About Polly
Topics: Family Finances |