My Money, My Choices
Gail Vaz-Oxlade is a personal finance writer, television host and radio broadcaster. Every Wednesday, she arms Metro readers with tips to keep spending in check.
Gail Vaz-Oxlade: Hiding your head in the sand is no way to get on top of debt
Take stock of your debts and devise a plan to pay them off while saving as much on interest as you can.
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Time and again when I ask people what they owe, they give me a litany of responses, quoting source of debt and balance one at a time.
When I say, “Add it up!” they look at me horror-stricken.
When they do add it up, they want to toss their cookies.
Then I make it worse. Hey, do you have a buy-now-pay-later plan? That’s debt! How about that Home Buyer’s Plan you have to repay every year? That’s debt! And your overdraft balance? That’s debt!
Thing is, until you pull your head out of the sand and add it all up, you have no idea how much trouble you’re in. You also don’t know where to apply your payments to save the most you can in interest.
Start by making a list of all the people you owe, from highest interest rate to lowest. Make sure you include:
• How much you owe
• What your interest rate is, and how much you pay in interest each month
• Your minimum payment required
Don’t include your mortgage on this list. Do include your student loans. If you have a car payment, you’ll have to make the call. It is consumer debt, but you may want to deal with it separately.
Next, add up what you owe and write the total at the bottom. Also add up your total monthly interest and your total monthly payments.
Then, take your total owed and divide it by 36. That’s how much you’ll have to make in payments every month to get the principal paid off in three years or less. Add it to the total interest and you’ve got the amount you have to put toward your debt to get out of the hole.
Now comes the saving part.
You know what the minimum payments are and you know what your total debt payment needs to be. Now you’re going to apply your payments smartly to save on interest. Take the total minimum payments and subtract it from your total debt payment amount. That’s the money we have to work with to save on interest.
You are going to make your minimum payments on all your debt. That’ll keep your credit history from getting bruised. Then you’re going to take the difference between your minimum and your total debt payment amount and apply it to the debt with the highest interest rate.
When that debt is gone, you’re going to snowball that payment into the payment for the next most expensive debt, and so on, and so on until you’re done.
You can choose to use a plan to get out of debt, applying your money in a smart way to save on interest and get your debt paid off as soon as possible.
Or you can leave your head buried firmly in the sand like an ostrich and just wait for the worst to sneak up and bite you in the butt.
De-ostrich-isizing isn’t an easy process. There’s a reason you’ve been in denial for so long. Doing this exercise takes work and can be extremely nerve-wracking.
But if you’re finally done with debt and you’re determined to save as much on interest as you can, this is the way to do it.