Step 3 – Pay Off High Interest Debt
If you own a home you will typically have a mortgage. The interest rate on that money is the lowest on any other loans you have – typically 3-6% interest. Next would be any auto loans at around 7-10% interest..
Credit cards and other unsecured loans are the highest at 18-22% and some even higher. Let’s begin by paying those off first. Let’s assume you have 4 credit cards with a balance. Amounts owed on each are $5000, $3200, $2000 and $1500 with payments each month of $300, $210, $150 and $50. Let’s assume your budget after expenses and 10% for short term savings has an additional $150. Take the smallest credit card and apply that additional money each month. In 10 months that card will be paid off and you’ll now have $150+50 that you can then apply to the next lowest balance. in 10 months (or sooner) that will be paid off and you can apply that payment amount to the next one.
In 4-5 years you can be free of credit card debt.
