Start a Spending Fast by Next Month | Week 4


This post is talking all about debt repayment.  Most people don't do a spending fast to save money.  A lot do, but a Spending Fast is sort of extreme, and people usually only go to extremes when something more serious is involved... Something like debt.

If you have debt, you need to consider your debt repayment BEFORE you begin saving for a rainy day.  Saving is important, but can come later, get out of debt first.  Why?  I'll tell you.

If you have $500 worth of debt but you save $500 next month, you have three options regarding what to do with your money? 1. You could spend all $500 on anything you want (bad idea).  2  You could put your $500 in a savings account at >1-2% annual interest (great for no-debtors).  3. You could begin paying off your $500 of credit card debt at 18% interest (yes for everyone with debt). 

If you're just saving, by all means, put the money in a savings account, or add it to your retirement fund, buy some CD's, shoot, just save it.  But for those of you paying off debt this is not advised.  Let's say you save $500, and no more, over the course of the year.  Let's see what happens to that money.  Right now, the economy is not great.  The national savings rate for a "High Interest Money Market account is only about 0.057%/year."  So after one year, your hard saved $500 will earn $2.86 in interest.  Wah wah.

If you don't put that money towards your $500 of credit card debt, and don't charge anything else, or make any payments on the card; after a year that $500 debt will end up costing you $108 in interest, and close to $420 in fees.  That brings your total debt to $1028!

See my don't-start-"saving"-yet-point?

Alright, so what if you're feeling overwhelmed by your debt?  How do you even begin to pay it off with what you save from the spending fast?

I like the Snowball Debt Repayment method.

Look at your debt bills. Seriously, look at them. It's amazing how many people don't look at their bills.  The number will be scary, but you need to do it.  Then, make a list of all of your bills, this includes credit cards, and loans.  Next, find out what you're paying in interest and write down that percentage next to your list of bills.  Finally, you want to re-write the list in the order of HIGHEST INTEREST RATE first.  No matter what the largest balance is, you want to list the highest interest rate as #1.

For example if you have a Visa with a $100 balance at 10% interest and a MasterCard with a $30 balance at 20% interest, a Discover card with a $600 balance at 12% interest, and a signature loan for $1200 at 6% interest, your list will look something like this:
  1. MasterCard       $30     20% 
  2. Discover Card   $600   12%
  3. Visa Card          $100   10%
  4. Signature Loan   $1200  6%
Every month with what you have saved, you're job is to make only the minimum payments on #2, #3, and #4, and put every leftover penny towards #1. Once #1 is paid off, then you'll make minimum payments on #3 and #4, and put everything you have left towards #2.  Get it?

It's amazing how fast people actually pay down their debt when they're aware of their interest rates! 


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