Which Debt to Tackle First?

Okay, so I've discussed the problem with debt and the need to establish a budget and emergency fund. Now we need to talk about the actual debts you have. Again, this information comes from The Total Money Makeover by Dave Ramsey. List your debts from smallest to largest in terms of how much you owe (do not include your monthly mortgage or rent payment). By the way, if you have balances on more than one credit card, you might want to consolidate them into one because it's much easier to hit one target than three or four. If you don't believe me, try juggling one tennis ball, then two, then three, and four.

Example:

1. Washer and Dryer -- $969.78 debt ($100.00 a month)
2. Car                      -- $7470.30 debt ($377.50 a month)
3. Credit Card/s      -- $8211.00 debt ($120.00 a month)
4. Student Loan    --$21,000.00 debt ($300.00 a month)

Once you have listed all your debts, you are going to work on the smallest debt first. Why the smallest? Because it's the first one you can eliminate and you will actually see the progress you are making. In the above example, it's the washer and dryer. At the current rate of $100 a month, it will take ten months to pay off this debt. 

However, you are going to marshal all your resources to knock the debt off sooner. This doesn't mean that you stop making payments on your other debts. It means you stop buying anything you don't need, and yes, that includes the daily Salted Caramel Mocha Frappuccino from Starbucks. If you must have your daily coffee fix, brew your own at home and take it with you. You might have to cancel the gym membership and walk or bike at the park instead. And check out whether another cell phone company can save you money. 

Let's say that through cutting back on some unneeded expenses, you are able to devote $150 a month to your washer and dryer payment. You will eliminate this first debt in 6.5 months instead of 10. Once you can scratch that debt off your list, you take the $150 a month you used to pay off the washer/dryer and devote it to the car payment. You will be paying $527.50 instead of $377.50 a month toward the car. Instead of taking 20 months to pay off the car, it now takes you a little over 14 months. Then you work on the credit card/s, and finally, the student loan.

In my next post, we'll talk about what to do once you've reached that exalted state of euphoria called being debt free.