The Debt Reduction Spreadsheet is part of a financial planning series called How to Make a Budget. To start this series from the beginning, read the introduction.
It’s time to get down to the business of paying down your debt. Yes, go ahead and call me a meanie and stamp your feet since I’m no fun. I can take it. I’m known across the internets for being a friend of frugal living and a foe to a life of indebted servitude. Debt is not your friend, and you should not be friendly with your debt.
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To get started with the Debt Reduction Spreadsheet you’ll need two things. First, you need to be brave and find your sense of debt-hating desire. To dig yourself out of debt you must want to do it, badly. Getting all wishy-washy and whining about your money woes doesn’t do you much good. You must face the facts to deal with this, once and for all.
If you’re new to the How to Make a Budget series or have just subscribed to Squawkfox, then go ahead and start from the beginning by reading the introduction. Several thousand new readers have joined since my last budget post, so I don’t want to leave anyone behind. I’m nice like that. 😉
The Debt Reduction Spreadsheet
The Debt Reduction Spreadsheet is not a fancy-dancy tool — I wanted to keep things simple. The idea is to track your creditors, list the balances due, acknowledge the interest rates on your debt, make your monthly payments, and then target one debt using the amount you have available for extra payments. Phew!
Download: Debt Reduction Spreadsheet
Step 1: Download!
Click to download your free copy of the Debt Reduction Spreadsheet.
Step 2: List your creditors.
I want you to take a close look at your debt. Remember when you listed your liabilities (what you owe) in the Household Net Worth Spreadsheet? Now it’s time to pinpoint the juicy, debty details. Start by listing all your creditors in the leftmost column. Easy.
Step 3: Enter the balances due.
For each creditor, enter the total amount owing to each. You’ll probably need all your bills to get this step done right. I’ll still be here by the time you gather all these documents. Promise.
Step 4: Type in your interest rates.
Depending on your interest rates, this can be the hardest step to swallow. If you’ve got credit card debt then you may have rates over 20 percent. Seeing how much you’re paying to keep this debt can be painful, but stick to it. We’re almost there!
- Credit Card Tip: Try the Credit Card Calculator to see how many years it will take to pay off your balance based on your minimum monthly payment. This should fire you up and get you on track to paying off your plastic. The interest you’re paying over the years is insane.
Step 5: List your monthly payments.
Go back to your bills and enter the monthly payment for each. Keeping up with your monthly payments is very important if you want to maintain a good credit score, but to get out of debt you’ll need to increase this amount. I’ll show you how in a bit.
Step 6: Enter the amount of money available.
Go back to your Budget Spreadsheet and find the line where you entered the amounts for Debt Repayment and Credit Card Repayment. Add up these bummers (oops, I mean numbers — typo stays) and enter the total in the Amount Available box in the Debt Reduction Spreadsheet.
Now that all the data is entered, you should see how the numbers add up. In my example above, you’ll see a total debt of $274,987.45 with an average interest rate of 4.50 percent (totaling $1,031.56 in average monthly interest), and a total monthly payment of $2,596.46. In this example, the indebted person has cash available to put against debt — $379.54 to be exact.
For those with little or no money in their budgets for debt repayment, there are two big choices:
- Cut costs: Cutting back and spending less money on your variable expenses is a surefire way to add additional dollars to your debt repayment plan. Read 50 Ways to Save $1,000 a Year for some stellar ideas.
- Boost income: I can see you giving me the stink-eye. Boost income? But how? This is where you have to really want to get out of debt. Income boosting tactics I have used include: getting a second job on the evenings or weekends, freelancing, asking for a raise, finding a higher-paying job, and selling crap stuffed in closets. See How to Write a Resume (that gets job interviews) to put some polish on your job application.
In the next step I’ll deal with how to apply the extra repayment against debt.
Step 7: Make extra payments against ONE of your debts.
Which debt do you pay off first? Financial debt gurus all seem to have their own branded methods for helping you get outta debt.
David Ramsey, author of The Total Money Makeover: A Proven Plan for Financial Fitness (also available in Canada), calls his method the Debt Snowball. This where you list your debts (excluding your house) and then focus your efforts on paying off the smallest balance first, regardless of interest rates. On his website, Ramsey says:
“The point of the debt snowball is simply this: You need some quick wins in order to stay pumped up about getting out of debt! Paying off debt is not always about math. It’s about motivation. Personal finance is 20 percent head knowledge and 80 percent behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.”
Ramsey adds that if you have two debts with similar balances, then pay off the debt with the higher interest rate first.
If you’ve ever turned on a television, chances are you’ve encountered the reality show ‘Til Debt Do Us Part with host Gail Vaz-Oxlade. In her #1 selling book, Debt-Free Forever: Take Control of Your Money and Your Life (also available in Canada), Vaz-Oxlade shares her no-nonsense approach to becoming debt-free. Debt advice is also available on her website, where she says:
“…you should start by paying off your highest-interest debt first. If you have a lower-interest loan that is causing you more emotional and mental stress than the higher interest ones (like a personal loan that has stretched family relations), you may want to start with that one instead. If you aren’t given the final say on which loans get paid off first, if something is important to you, you should still fight for it to be paid off in a timely manner.”
Vaz-Oxlade is also a fan of consolidation loans and calling up your creditors to negotiate lower interest rates.
Step 8: Stick with it!
Whether you pick to pay off your smallest balance to start or choose to end the debt with the highest interest rate first, the point is to stick with it! Once you’ve retired one debt, move that payment to your next creditor on your Debt Reduction Spreadsheet.
I used this method successfully when I paid off my $17,000 in student loans over six months. I started with my highest interest loan first, and then snowballed my repayment by tackling the next highest interest debt on my list. You can do it too — you just have to want it bad enough.