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Make meaningful improvements to your finances every week.

Now's your chance.

Make meaningful improvements to your finances every week.

Debt Relief for Dummies

 

Your debt is an emergency and it should be treated as one, you need a debt reduction plan to regain control. Come find debt relief and take back your life.

Debt is a serious problem, so much so that not too long ago it brought the global economy to its knees. It’s great that we’ve finally realized there is such a thing as too much debt but  there seems to be some confusion.

Debt is an emergency!  Being in debt is like seeing your house on fire. You need to take immediate and meaningful action to stop the damage before it’s too late.

That’s where Debt Relief for Dummies comes in. This guide is going to be slightly different than my other guide, Budgeting for Dummies in that I’m not just going to walk you through a free product that can assist you but I’m also going to give you a nice shortcut.

At the end of the day there is no wrong approach to paying down your debt, it really depends on you. If you’re a DIY guy like me you’ll appreciate the walk though, however if you’re extremely busy and just want things taken care of now I think you’ll jump at the shortcut (hint: It’s way at the bottom).

Also, I think it’s important to mention that both reading and implementing this guide will take you less than 30 minutes. Take the time and set yourself up for a better financial future, stop procrastinating and get your debt under control now!

Debt Relief the Guide Introduction

Since we agree that your debt is an emergency, we’ve now got to destroy it. There are a few different debt relief strategies you can follow. We could spend time debating the merits of each one but I don’t want to bore you to death. We’re going to discuss the two most popular strategies which also happen to be the easiest to follow. They are also great because they will quickly give you a feeling of accomplishment.

It’s important to remember that the biggest reason you’re in debt isn’t your lack of knowledge about debt, but your behavior.  Since follow though is key to your success, I’ve picked the two strategies you’re going to be most likely to actually do.  These two strategies are The Debt Snowball and Debt Consolidation.

The Debt Snowball was first popularized by Dave Ramsey. Simply put, the strategy is to pay the minimum on all of your debts except for the smallest one which you will pay off as quickly as possible. Once you clear that debt you will move on to the next smallest debt, and so on until you have only one debt balance left which you will focus on paying down.

While mathematically it would make the most sense to pay off the debt with the highest interest rate first, we’re going to concede that you are not in this position because you can’t do math. The problem is your behavior. Understanding this, the Debt Snowball method focuses on getting small, measurable results quickly so that we can feel like we are accomplishing something.

The second and my personal favorite strategy is Debt Consolidation. I spoke about it briefly here but we’ll go into more depth in this guide. The idea behind this strategy is that you take your multiple high interest debt balances and pool them into a single loan that has significantly lower interest.

This will help us focus our payments on one large sum that will grow much more slowly than if we had left the interest rates alone.  Another side effect of this approach is that we may find some opportunities to shed debt free of charge though a consolidation and negotiation service like National Debt Relief, but we’ll talk about that later.

Creating Your ReadyForZero Account

Total Time: 8 seconds

ReadyForZero will be our Mint.com equivalent for tracking and paying down debt. It’s a great debt relief tool because it will track all of your debt, graph it over time, do all of our debt related math for you AND you can make payments though it. Imagine a world where you log into one website to manage and pay down your debt. Yup, that’s the ReadyForZero world.

First thing’s first, we need to create an account. Go ahead and do that by clicking here and filling in an email/password.

Linking Your Accounts

Leave no stone unturned

Leave no stone unturned

Total Time: 5 minutes

Great, you’ve created your account! Now it’s time to link up all of that debt. If you have experience with an online budgeting tool (and I hope you do) then this step should feel very familiar. Go ahead and search for all the different financial institutions where you’re keeping your debt and add them in.

Leave no stone unturned, in order for this to work we need to see the full ugly picture of your debt. While you’re adding in all of your accounts, be sure to click forward to the next step.

Deciding On Your Debt Relief Plan

Decide how quickly you'll be debt free

Decide how quickly you’ll be debt free

Total Time: 10 minutes

Here is where the real action happens. Just move that slider to the sum of your minimum payments and you’ll see the world of hurt you’re in for if you don’t proactively try to destroy your debt.

However, I don’t think you would have read this far down if you didn’t intend to make a serious effort at reducing your debt so lets see how we can come up with the best number here.

Debt payments should happen with the money found in between the total you get paid after taxes a month and the amount you budget for your day to day expenses. This savings rate should ideally be at least 30% of your take home salary. If it’s a lot less, just remember, being wealthy is a choice.

One option is to take your full monthly savings and put it towards your debt. That approach is definitely ambitious but doable. I’m going to recommend that we take a bit more conservative approach. Things happen that we can’t foresee so I think it is important to always have an emergency fund just in case.

Let’s take 20% of our budget-to-income gap, otherwise known as our savings rate and put that money into a low risk money market account like Betterment that will earn us some real cash. The remaining 80% we’re going to use to pay down our debt.

Go ahead and shift the slider to the number you’ve settled on and click Show Me My Plan.  This number is what you’re going to pay every month towards your debt. ReadyForZero will not only tell you how long it will take you to be debt free based on this number but you can also have them automatically pay down your debt for you.

If you can afford the $4.99/month on top of the already free service I definitely recommend it.  Personally, I think the best approach is out of sight, out of mind. Plus, it’s best to have the computer make the payments so it happens consistently every month, even in your moments of weakness (we’re all human).

Setting Up Automatic Payments

Automate payment so you don't forget

Automate payment so you don’t forget

Total Time: 10 minutes

Hopefully you felt it prudent to upgrade for automatic payments. By making regular, large payments towards your debt you will undoubtedly save more than $4.99/month, plus you can save your valuable brain juice for other more important things like negotiating a raise or spending time with your loved ones.

The good news is if you sign up now you can actually get $25 off the ReadyForZero PLUS plan if you use the promo code payaccel50.

If you did upgrade your account, all you need to do is link your checking account in settings and boom, you’re done. As you make payments towards your debt, ReadyForZero will keep track and update you on your progress via email.  Sweet!

If you didn’t upgrade your account, all is not lost and you can still succeed, it will just take a bit more of your time. If you’re using the Debt Snowball method we discussed above then log into all of your accounts that have debt and set them up to automatically pay the minimum payment. Then, log into your account with the smallest balance and set it to pay the remaining money you set aside for debt each month.

There you go, now your entire debt relief plan is automated. If you didn’t automate with ReadyForZero just remember to keep an eye on your account balances. Once you pay down the balance of your smallest account, you will need to log into your next smallest balance account and adjust the automated payment with the remainder of cash set aside to pay down your debt. If you forget this step it can seriously derail your debt reduction efforts so definitely set up a few alerts so that you don’t forget!

Celebrating Your Progress

A long journey is completed one step at a time

A long journey is completed one step at a time

After automating your payment, I would say celebration is the most important part of his strategy. Remember how debt is 80% mental?

You need to celebrate your success, especially with friends and family. When you tell other people about your plans it will keep you motivated and it is more likely that you will stay on track (they can help hold you accountable).

Track your progress and get excited, it’s these small victories that slowly add up to big achievements. The hardest part is just getting started!

The Debt Relief Shortcut

Now lets talk about the Debt Relief Shortcut shortcut.  I wanted to save this until the end because the absolute most important part about getting out of debt is just getting started.  You shouldn’t let another day go by without taking action so I’m glad we got our ReadyForZero automation setup.

ReadyForZero is great and I absolutely recommend you use it. However I also recommend that you take a tried and true shortcut. For the sake of this article, lets give it a fancy name – Interest Rate Arbitrage.

Right now a significant reason why your debt is so big and will take so long to pay off is the interest rates you have to deal with. If some or all of your debt is on a credit card, you’re likely getting killed on the rates which could be as high as 19%!  Just by following though on Interest Rate Arbitrage aka Debt Consolidation we could significantly reduce the time it takes us to pay back our debt before we pay a single dollar towards our debt balance.

The way it works is simple, say you have a $1,000 balance at the end of the month. With a 19% interest rate, that means you pay $190 in fees for no reason. If you consolidate all of your super high interest rate loans into a single loan though a debt consolidation service, you may get a rate at around 7%. Effectively that cuts the time it takes you to pay interest into less than half of what it use to be. With that one step you could save years on your debt relief schedule.

One such excellent debt consolidation service is National Debt Relief.  Of course you will have to pay them a small fee to refactor your finances but you can easily save much more than the fee in just your first month’s interest payments. If your repayment plan is going to take months or years you should seriously seriously consider a debt consolidation service.  If you don’t reduce your interest rate you will just be throwing money away for no reason.

An added benefit to partnering with a debt consolidation service such as National Debt Relief is that they will also try and negotiate with your creditors. While nothing is guaranteed, there is a very good chance that they can reduce the overall total you owe which will further reduce the time it takes you to pay down your debt.

Crush That Debt!

There is nothing more important than paying down your debt, it’s an emergency!  You shouldn’t be spending money on entertainment or wine or cable if you’re in debt. If you are, you’re effectively buying everything on credit and paying an 19% markup (your debt interest rate).

Stop the endless debt cycle, set yourself up with ReadyForZero and automate your debt relief plan. You should even take it a step further and consolidate your loans under a much lower rate with National Debt Relief.  Stay focused, I think you’ll find that getting out of debt isn’t terribly difficult.  The hardest part was just getting started.

Also, here is a video of a guy who felt crushed by his $100,000 debt and focused 100% of his energy towards paying it off. He was able to do it in less than a year!  Many small sacrifices can go a long way.

Featured Image Photo Credit: “Laughing Cat” by Pete Coleman

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  • What a great rundown. Nice how you spelled it all out. I am sure this will be a good resource for those dealing with debt.

  • I really liked the idea of ReadyForZero when I first heard about it. Since then I was able to pay off my high interest credit card. I only had $2,500 on it, but it was at 24%. Insane. I just saved up and paid it off last month.

    I have two more credit cards to go. One is a Discover card with $2,000 and 16% interest and one is a CitiBank card with only $1,000 and no interested until September.

    I have enough money to pay off the CitiBank one, but do you think I should tackle the big one first or the small one before I get hit with interest come September?

    • Matt, it sounds like you’re on an excellent trajectory towards being debt free. More importantly I can see you are very dedicated towards clearing your debt and you’re beyond the classic motivational issues that usually come along with carrying debt. With that said, I think you can skip the Debt Snowball approach and tackle your $2,000 Discover card debt so you’ll have less of a penalty when the next payment comes due. Let the $1,000 ride for now as it’s interest free.

      It’s great to hear you’re making solid progress, keep up the good work!

  • Thanks Andrew. Excellent post, please keep in touch.

  • Excellent comparison with debt and a burning house. There might be some instances that you might feel helpful looking at it a bigger picture but on the other hand, you need to do something about it. Do it one pail at a time. Ask for other people’s help and that fire will be controlled and eventually, disappear.

    • Great point KC, if you’re in trouble you should never be afraid to ask for help. Everyone makes mistakes and your friends/family are there to help you get though it!

  • Andrew, I like your idea of Interest Rate Arbitrage for
    consolidating debts and tracking them with ready for zero is a good suggestion
    too. Let’s also remind your audience
    that lending club, prosper, and upstart are good resources to raise the needed capital
    to follow your suggestion.

  • That video was great! I just signed up for an account at readyforzero. I made a dumb mistake at 19 and have 35k @ 9% private loan owed. Going to look into something like SoFi or Earnest to lower the interest rate…thoughts?

    • We have a very strong relationship with SoFi and while they are picky about the loans they will refinance, the people who do get accepted are getting incredible deals with some as low as 3.25%. You and LMM will also get a cash bonus if you use our referral link from the Toolbox page :)