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Debt

Seven Creative Ways to Get Out of Debt

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By Oliver Bochsanckel

If you have found yourself in debt, whether student loan debt or credit card debt, you may be looking for some ways to get out of it. If you want to secure your future, you need to make sure that you are always making your payments on time and keeping up with your bills.

We know that it can be difficult to maintain all of your expenses at the same time, but it is vital that you do. If you want to get out of debt quickly, you are not alone. In fact, some people take extreme measures to make sure they owe nothing and start out on the right foot.

Below, we will go over some creative ways that you can help pull yourself out of debt. We know that some of these options sound a bit off the wall, but they have helped many students and graduates move away from a life filled with debt.

  1. Use Your Reward Points

If you earn rewards points for your credit cards, for performing surveys, or even through your local electric company, think about cashing out these points and using them to pay off your debt. While it may seem like it takes forever to cash out these points, every little bit helps. When considering a new credit card, you should pay specific attention to the cash back rewards rates. Luckily for college students, student credit cards typically have high cash back rates which makes it easy to capitalize on rewards.

For example, some cash rewards programs offered by banks for taking surveys will allow you to cash out when you hit 20 points. Typically, every couple of points fetches you a dollar amount that can then be claimed as a cash reward or even on a gift card.

  1. Have a Yard Sale

If you are tired of seeing a bunch of items lying around your house, consider having a yard sale. You will be able to declutter your space while making extra money too.

One of the best ways to make your yard sale a success is to get rid of duplicate items and price within reason, so that others will purchase the items. For instance, if you have a microwave you no longer use, slap a $5 or $10 sticker on it and it will fly off the table like a hot cake. Another easy way to make your sale a success is to advertise on craigslist.

Remember, when people go to yard sales, they do not expect to pay retail, so if you have an item that you think is worth more than a couple bucks, save it and sell it later on.

Any money you collect from your yard sale can be applied to your debt. Every little bit makes a difference.

  1. Enter Contests and Giveaways

While it may be a long shot, if you have the chance to enter a contest or giveaway, do it. You never know when your luck might change and you may win that local $1,000 reward offered by your local grocery store. It is worth it in the end to at least try. Imagine if you did win, you could climb a couple of rungs to help get you out of debt.

  1. Start a GoFundMe Page

You never know who may donate to help you get out of debt. Start a GoFundMe page and share it with your friends and family. Each person can make a donation to help you climb your way out of debt.

  1. Open a Small Business

While you may have never thought to open your own business, it doesn’t hurt to do it temporarily to help pay down your debt. In fact, having a small business will allow you to set your own hours and allow you to work when you want to. This also means that you can have another job on the side without the two clashing together.

When you start to think about business ideas, think service related such as pet sitting, dog walking, lawn mowing, etc.

  1. Cash in Your Change

If you have change lying around your house, it does add up. Collect all of your change from your pockets, couch, and anywhere else you may store it and head to your local bank or to a local establishment that has a Coin Star or similar. Since you were not using this extra change for anything, simply apply it toward your debt. If you do this once a month, you may be able to send in an extra $25 or $50.

  1. Coupon

Food is a necessity, but it does not have to be expensive. Spend some time couponing on the weekends and you will quickly find that you can cut your grocery bill in half. You may even receive some free items!

If you are looking for ways to get out of debt, start with these seven creative ones and soon you will find yourself much closer to a debt-free life.

 

PF Notecard # 4: Get Out of Debt!

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Advice on a card 2Easier said than done if you’ve got a mortgage, a car payment, and a lingering student loan. Here we are at Item #4 of all the PF advice you need to know crammed on a notecard.

Two things worth knowing about debt:

• It can be the biggest rip-off that ever came down the pike.

• There’s a trick to getting out from  under it.

Debt — for bank loans, payday loans, car title loans, credit card loans, and whatnot — is a rip because it tricks you into spending more money than you have (or may ever have) and because it causes you to spend far more for an item than it’s worth. By the time you’ve paid on a home mortgage for 30 years, for example, you’ve paid at least twice the purchase price of your house. Yeah, you’ve gotten a little tax write-off, and yeah, 30 years from now your dollars will be worth so little that the house will appear to be “worth” twice as much as you paid for it. But because you’ve paid that much, when you sell the house you won’t make any real profit on it: you’ll be lucky if you break even.

Auto loans are even worse, because a car loses value with every minute that ticks by. Your car is objectively worth far less than you paid for it, and far, far less if you paid interest on a loan over any length of time.

Here’s the thing about interest: in the early years of a loan, almost all the payment goes toward interest. Thus you’re not really paying much of the principal — the amount you actually borrowed — until the loan has aged like a wheel of Camembert. As time passes, you pay down the principal in tiny increments…after some months or years (depending on the size of the loan), you’ve paid enough principal that fewer dollars per payment get eaten up in interest. That is, the more principal you’ve paid (the less remaining to be paid), the less the amount of each payment represents interest.

So: you can speed the pay-down of a loan by prepaying principal. This means that you make your regular payment on, say, the car. And in addition, you also pay a few dollars a month — it needn’t be as much as you fear — toward the principal. As you pay down the principal, the amount the lender can charge you for interest drops accordingly and the amount of your regular payment going toward principal rises. So, prepaying principal can significantly decrease the amount of time you have to pay on a large loan.

If you can afford to make one extra house payment a year — 13 payments instead of 12 — do it. That also reduces principal over time. Better, though, to pay as much extra as you can each month toward principal. The faster and the earlier you pay down principal, the more of your future payments will go toward principal and the less toward interest.

Lenders are wise to this scheme, of course, and some will try to trap you into a contract that doesn’t allow you to pay principal in advance. Pay attention to the terms of any loan contract, including credit-card agreements. If you can’t figure it out, ask if you’re allowed to prepay principal. If the answer is “no,” don’t sign on that dotted line! Find another mortgage lender. Buy your car somewhere else.

Credit-card debt is especially pernicious, because the interest rates are absurdly high. In fact, credit-card lenders are allowed to charge interest rates that used to be against the law and, IMHO, should still be against the law. Essentially, when you get yourself into credit-card debt, you invite legalized criminals to victimize you.

Don’t do it if you can avoid it.

But if you are already in credit-card debt, you need to escape. The same theory applies here: pay off principal as fast as you can.

Let’s say you’ve run up several cards. The best approach, IMHO, is to pay down one at a time. Which one to start with depends on your personal mentality. Some will have higher interest rates; some will have higher balances.

In theory, it makes sense to pay down the ones with the higher interest rates first. However, if a large balance  at a lower rate makes you feel like Atlas balancing the weight of the world on your shoulders, then by all means get rid of that one first.

How?

• First, stop charging things. If you can’t afford to pay for something out of pocket, don’t buy it! That includes meals in restaurants, which will run up your charge card faster than a mouse racing around in one of those little wheels. Eat in. Buy clothes frugally. Don’t buy anything you don’t really need. And use the savings to pay down principal on the chosen credit card. This means that you send in more money than the minimum payment: If you have $1,000 charged up and the minimum payment is $50, send in $150. Over time, the extra amount will pay down the total amount due…but only if you’re not adding to the debt as you go.

• Next, budget a specific amount per month to pay toward the selected underwater credit card. Eventually, that will pay off the card.

• And third, throw every windfall you get at the debt. Every tax refund, every kickback on the Costco credit card, every cash birthday gift from Mom and Dad should go right straight to paying down principal.

• If necessary, get a side job to generate extra cash for the purpose of paying off debt.

Sooner or later, you’ll pay off your targeted credit card. Hallelujah! Have a party — you could even go out to dinner…once…as a celebration.

Then take your budgeted amount and start applying it to the next card.

Keep this up long enough, and sooner or later you’ll have all the cards paid off.

By that time, you’ll be used to living below your means. This is a good habit to have developed — don’t change it.

Instead, use the money that you were throwing at the credit cards to pay down the car loan. Once you have that paid off, start applying the same amount toward mortgage principal.

It makes the best sense to pay off debt in this order:

• First, credit-card debt. Why? Because credit-card interest is exorbitant and truly destructive.

• Next, car loans. The less you pay toward a commodity whose value is decreasing steadily, the better. This also is destructive debt, but not to the same extent as credit-card debt.

• Then, the home mortgage. Because (in theory) your house is appreciating in value and because you get a small tax break on your mortgage interest, mortgage debt is not as destructive as automobile and credit-card debt. But it’s still something that sucks away cash flow that could be supporting you more comfortably or going into retirement savings.

• Finally, student loan debt. Interest rates are fairly low on these instruments, making them less evil than other forms of debt — although a student loan, too, sucks money out of your pocket.  If you’re one of the lucky people whose college education helped you to get a decently paying job, then a student loan in fact represents a kind of “positive” debt. That doesn’t mean you shouldn’t get rid of it; only that it’s not as pernicious as the first two or as burdensome as the third.

It’s surprising how fast prepaying principal brings down loan debt. I was able to pay off my first After-Divorce car, a very nice Camry, by taking every windfall straight to the credit union and telling them to put it toward principal and by paying a set amount extra each month toward principal.

The car had a five-year loan on it. I paid it off in 18 months.

You can do that, too.

🙂

All You Need to Know about Personal Finance Fits on a Notecard
#1 Get an Education
#2 Get a Job
#3 Live below Your Means

 

Smart Debt: Is there such a thing?

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Influenced by Dave Ramsey, one of my honored students — maybe even a budding PF blogger, who knows? — writes on the horrors of debt. It’s pretty adorable stuff, in its lively and charming youth. The gist of his squib is that all debt is to be avoided, come Hell or high water.

There’s a lot to be said for that point of view. Matter of fact, our friend D. R. White (he of Motivating Minutes) has just published a new book on the topic: How to Get Out of Debt: Using the Internet. He includes the stories of fourteen PF bloggers (full disclosure: one of them is moi) plus ideas and tools to help you plot a course toward a debt-free life. He’s pretty proud of it…so now’s the time to run over to Amazon and grab your copy.

Reflecting on the student’s  jeremiad, though, it strikes me that true, full-blown debt-phobia entails a fundamental fallacy: it is not so that all debt is necessarily bad. What is bad is to get so deep in debt that should unforeseen circumstances occur (another recession or economic depression; illness; unemployment; whatEVER), you can’t make the payments.

Some kinds of debt are beneficial, though. For example, even though college tuition is now exorbitant, a typical young person with a bachelor’s degree will earn almost a million dollars, over a lifetime, more than a typical young person with a high-school diploma. Even after college loan debt and taxation are subtracted, the college graduate’s net gain amounts to hundreds of thousands of dollars.

The typical American college graduate  ends up with a relatively small student loan: . While that’s not pleasant, it’s actually about what a late-model car costs. Most people can pay off a car loan in five years. BUT the difference between a college loan and a car loan is that the college degree APPRECIATES over time (returning many thousands of dollars in enhanced earning power) while a car DEPRECIATES over time.

The college loan returns cash to the borrower and buys an asset that lasts a lifetime. The car loan takes money way from the borrower and leaves behind a devalued asset.

In effect, the college loan leverages debt to the borrower’s advantage. The car loan works to the borrower’s disadvantage. Thus one could argue that some kinds of debt actually benefit the borrower while other kinds work against him or her. The challenge is to identify what kinds of debt are worth taking on and what kinds represent a threat to your financial well being.

Similarly, a mortgage on a fairly priced house (not one whose value has been inflated during a “bubble”) may work to some people’s advantage. If you are earning money and investing it in a 401(k) or other type of fund, in an economy such as the one we’re in now, your investment returns about 9 percent. But today’s mortgage rates are still under 4 percent.

So, instead of paying off the mortgage, you’re better off to invest the amount in securities, which at this time are returning about 5% more than you would “gain” by throwing your money at the mortgage debt. Here, too, you leverage money to your advantage: you have to have a roof over your head, and the low-interest loan makes it possible to have your cake and eat it, too.

On the other hand, credit-card debt is usually disadvantageous, because most of it goes to buy material things that often are not needed at all. A television set, a closetful of clothing, a hundred dollars worth of fancy department-store make-up, a comic-book collection, a new computer game , a restaurant meal: none of these things appreciate in value or make it possible for you to build wealth. Thus this type of debt represents a drag on your financial well being.

These are important distinctions. They point to the fact that people need to have some financial sophistication to thrive in today’s extremely complex economy.

A loan that allows you to earn more or save more can be said to be “smart” debt. One that takes money out of your pocket and returns nothing of real value — well. Not so much.

🙂

Credit Bureau Security Freeze: The (Mostly) Pros and (Few) Cons

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As you may recall, as the current identity theft drama materialized, a fraud specialist at Experian recommended placing a “security freeze” on my accounts at all three credit bureaus, Experian, Equifax, and TransUnion. Since she sounded like she knew what she was doing, I went ahead and did that.

And know what she was doing, she certainly did.

Yesterday, after having spent the entire day trying to reach a human at Social Security by way of rerouting my direct-deposited SS checks to the new credit-union account, I finally stumbled upon a live person, late in the afternoon. I’d tried to register myself with SS’s online site and failed, so called a “Help Line” tech — instead of the hour and fifteen-minute wait to reach a human at SS’s main phone number, it only took about ten minutes for this woman to surface.

She said the reason I couldn’t register online at Social Security is the security freezes I set up at the credit bureaus: The government’s site checks with credit bureaus before allowing just anyone to claim they’re you and get online as you.

I said, “So, now I’ve got to go to these bureaus and undo all these security freezes before I can get my check?”

Actually, I was so upset, so frustrated, and so scared that at least one and probably two or three checks are not gonna reach me that I started to cry.

She said no, she could manually enter credit union’s routing number and new account number, which she (purportedly) proceeded to do. Let’s hope she succeeded!

She then said having a credit-bureau security freeze is a good thing, because it goes a long way to prevent identity thieves from hacking into the Social Security Administration disguised as you, even if they have your SS number. Although it doesn’t protect you from all forms of identity theft, it goes far enough toward blocking credit-card and Social Security fraud that she suggested keeping it on the credit bureau accounts permanently.

Consumer’s Union, which has been among those lobbying for security freeze laws, points out that a security freeze costs you a one-time fee of just a few dollars or, in some cases, nothing — credit “monitoring” is an ongoing fee-based service — and it’s more effective because it proactively prevents anyone from opening an account without your permission. All credit  monitoring does is notify you after the barn door has been opened.

A security freeze is different from a fraud alert, which you can also establish with the credit bureaus. A fraud alert tells creditors that you have alerted the credit bureau of possible fraud but does not prevent them from viewing your records. A security freeze prevents prospective creditors, insurance companies, and employers running background checks from seeing your credit file unless you give your consent.

And that is a very, very large benefit when it comes to protecting your privacy! It’s huge.

The trade-off is a degree of inconvenience: for you to open a new credit instrument (such as a credit card, a car loan, or a mortgage), you have to go to all three credit-union sites and jump through the telephone punch-a-button hoops to enter a PIN and lift the freeze long enough to get your transaction through. Then you have to go back and punch buttons again to reinstate the security freeze.

This is not very difficult, though. And not difficult at all compared to the enormous hassle and grief occasioned by an identity theft. On average, most people have to spend 40 hours cleaning up the mess created when some crook opens a credit account in their names.

The credit freeze does not affect your credit score. You still can get your annual credit reports for free. Your existing creditors (and their collection agencies…) can still view your credit files. And the credit freeze does not stop nuisance “pre-approved” credit-card offers from showing up in the mail or by phone.

There are some kinds of fraud the credit freeze does not guard against. For example, the increasingly popular income tax fraud — whereby the hacker fills out a fake income tax return and has a tax refund sent to the address of his choice — is outside the purview of this device. Obviously, if someone steals your credit or debit card, he can rack up some bills (or, with a debit card, drain your bank account and credit reserve). But for anything where a credit search is required, this tool is very valuable.

The State of California has a law that gives you a right to put a security freeze on your credit records. The state’s Web page describing the security freeze is worth bookmarking — it not only explains the process and how to install a freeze, it gives you tools for recovering a PIN should you lose it.

Consumer’s Union recommends that you protect yourself with a security freeze if you’ve learned that your Social Security number has been compromised in a security breach, if your mail has been stolen, if you’ve already had an incident of identity theft, if you’re in the particularly vulnerable age group of 18 to 24, or if you have to carry around a card (like a Medicare card) bearing your SS number.

* * *

Arriving at this knowledge was a freaking nightmare, I’ll tellya. Yesterday devolved into a true day from Hell.

I showed up at the Social Security office in search of a live human right when they opened: 9 a.m. Three parking spots remained in the lot, and one of them was a disabled space. The line to get past the security guard was out the door.

Fortunately, I’d brought my computer so I could work on a client’s book. Took a number and sat in the only open seat that had a little room around it.

There was a reason for that: in front of me were two street people. The woman was high on some sort of drug — in the course of her endless droning conversation with her pal, she remarked that she was taking an extra-heavy dose of oxycodone. The man smelled bad.

Between this woman’s nonstop babbling and the guy’s stink, I couldn’t focus on my work. Finally another seat opened up across the room and I was able to dodge into it before another customer could beat me out.

So I sat there for an hour and a half!

To no avail: at 10:30 I had to leave to go to a real appointment. Thence to La Maya’s house for lunch. By then I was so rattled I carried a bottle of wine over there for a house gift…i.e., as the day’s drug of choice.

La Maya doesn’t drink much, but in due time La Bethulia showed up, fresh from a job interview that sounded extremely promising. So between the two of us we consumed about 4/5 of the bottle.

Back at the Funny Farm, the telephone awaited. After first trying to get through on the Social Security web page, I did have the luck to reach the CSR described above and, with any luck (please, God!!) got my checks routed to the new checking account.

Meanwhile, the magazine writing students had posted their final papers: 15 of those also awaited. Read papers until about 9:00 p.m., at which point I fell face-forward into the sack.

In all this flailing around, I forgot to plug in the lights I hung in the trees to try to protect them from the frost. So the lime tree will probably lose about a third of its canopy. Still…at 6 this morning, before sunrise, it wasn’t cold enough to destroy the oranges, I don’t think.

Thank heaven for small mercies.

🙄

This post was kindly included in the Carnival of Personal Finance at Money Life and More.

What a Lender Is Thinking…

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Learning a lot from the real estate course. Right now we’re discussing lenders and their financing instruments. Ever wonder what a lending organization has in its collective mind when you apply for a loan? Here’s what an underwriter thinks about when he or she considers your application:

• Credit: have you used credit responsibly in the past? Do you have a decent credit history?

• Capacity: Do you have enough financial resources (income, wealth) to repay not just the proposed mortgage but also your existing debts?

• Character: This subjective assessment has traditionally been defined as your “desire” or “willingness” to repay the debt.

• Collateral: Is the value of the property to be mortgaged adequate to secure the loan?

Underwriters try to quantify their institution’s risk by calculating a “loan-to-value” ratio (LTV). To figure it, take the amount of the mortgage you’re asking for and divide it by the sales price or by the appraised value, whichever is lower. The result is the LTV, expressed as a percentage. The higher the LTV, the less the borrower has at stake in equity. Obviously, the less equity you have in a loan, the more likely you are to default, eh?

For example, at the time M’hijito and I bought the downtown house, it appraised at around $235,000. We borrowed $209,000 to buy it. Hmmmm….

209,000/235,000 = 88.9%

Today the place is worth about $180,000. Wanna see a figure guaranteed to give our lender heart failure?

209,000/180,000 = 116.1%

😯

{gasp} We’ll just keep that between you & me & the lamp-post, hm?

Moving on, what does the LTV mean when you’re trying to get a loan? Well, for one thing, according to FHA guidelines, the amount of any insured mortgage may not exceed 97.65% of the property’s appraised value (make that 98.75% if the value is 50 grand or less).

So, again using the downtown house, the maximum FHA mortgage we were eligible for, back in the day when we thought the market had hit bottom, was

235,000 x 97.65% = $229,477

In other words, we borrowed about $20,000 less than we could have, in theory. To take the place off our hands today, the most a buyer could borrow based on its alleged current value would be $175,770.

Another factor that depends on the LTV is the maximum amount you, as a borrower, are allowed to contribute to various closing and ancillary costs. These include such nicks and dings as the origination fee, discount points, the cost of a credit report, appraisal fees, escrow, title insurance, recording fees, prepaid interest, taxes, homeowner’s insurance, and the like. The seller may pay all or part of your contributions, but the total can’t exceed the allowable maximum. How does this shake out?

• If the LTV is greater than 90% on your principal residence, the maximum percentage of your contribution that may be paid by the seller is 2% of the selling price or appraised value, whichever is less.

• If the LTV is 90% or less on a principal residence, the seller may contribute no more than 6% of the selling price or appraised value.

• For a second home, if the LTV is 80% or less, the seller may contribute no more than 6%.

Any costs that are normally the buyer’s responsibility are considered to be “contributions” if the seller pays them.

 Who’d’ve thunk it?

 

Stress-Free Finances: Close Out Revolving Debt

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The biggest drain on your budget—and one of the biggest financial stressors around—is revolving debt: credit card and store card debt. The availability of easy credit in this country has had strange effects on the consumers’ psychology and on the way businesses work; IMHO it’s not especially good for either party.

The other day I saw an ad for those Bose headphones that are supposed to block out ambient sound, creating the illusion of silence. Like all things Bose, they’re expensive: three hundred bucks. So, the company offers an “easy” 0% payment plan on purchases between $299 and $1500.

Wow! For just $25 a month, we can have this miraculous electronic object, right now! Who can’t afford this? Let’s order one today…

What’s wrong with this picture? Well, to start with, that’s $25 a month that you’re committed to pay, not that you can pay if you happen to have an extra twenty-five bucks laying around. If something happens to stress your budget—you have a big dental bill; the kids need money to go on a school field trip to the marine biology station in Baja California; some chucklehead rear-ends you and you have to pay a big deductible on your car insurance—suddenly, it’s not so affordable. And to end with, when you realize you can get your hands on things you want without paying for them, quite naturally you’re likely to start grabbing everything you can get.

The result is your debt, most of it costing a lot more than 0% interest, soon gets out of hand. It starts to consume more and more of your monthly income, until you’re saddled with never-ending debt payments that leave nothing for you to spend on anything more than debt repayment and bare necessities. The cost of what you’re buying on the cuff increases by the amount of the interest: if you’re paying 18% interest on some credit card, a $100 purchase actually costs you $118. This means the value of every dollar you pay for an item is actually only 82 cents: $1.00 less 18 percent.

Meanwhile, businesses and lenders love it. Or so their management thinks… For the nonce, you’re buying with abandon and paying through the nose for the privilege. Merchandise is moving briskly, and you’re on the hook for a lucrative debt from which you may never get free. You are, in short, a cash cow.

However, eventually the cow will run out of milk. At some point, you will no longer be able to purchase much of anything, even necessities, especially if you lose your job or some other hardship comes your way. When people face hardship, as has been the case after the 2009 economic crash, they stop buying. And when consumers stop buying, businesses go belly-up.

That’s why, in the long run, revolving debt is as bad for business as it is for you and me. Eventually, it will drive us all into the hole.

The solution is easy: buy things when you can pay for them, not when you want them. If you can afford to pay $25 or $100 a month to a credit-card issuer, you can afford to pay $25 or $100 to yourself. Put the money into a savings account, and when you’ve accrued the $300 for the marvelous sound-blocking headphones, go to the store or the online site and buy them—and pay for them. In cash.

Now you own them; they don’t own you.

But what if you’re already in debt up to your schnozz? What if you’re at the point where all you can do is make the minimum payments on an array of credit cards that could be used to play Blackjack if only they had spades, diamonds, clubs, and hearts printed on them?

It’s discouraging, but it’s not hopeless. Lots of people have managed to get out of debt, and you can do it, too. Here are the strategies:

First, stop charging! Take the credit cards out of your wallet and stash them in your file cabinet. Until you get the debt paid off, if you can’t buy something in cash, don’t buy it. Put off purchases, large and small, until you have the cash to pay for them.

Next, try to consolidate credit-card debt on the lowest-interest card you can get. Some lenders offer rates as low as zero percent for limited periods. Try to transfer as much of your balance to a low- or zero-percent card as you can, giving yourself a period in which to pay down the balance that you can’t transfer first.

Call your card issuer and ask if you can work a better deal. Sometimes you can negotiate lower minimum payments in exchange for a higher interest rate, or a lower rate if you agree to make higher minimum payments.

I personally would never borrow against my house to pay off credit-card debt, because it’s too risky. However, if you still have equity in your house and you’re facing credit card debt in the range of thousands of dollars—and you know, beyond a shadow of a doubt, that you can be disciplined enough to pay it down and to stop charging on cards altogether—interest on a home equity loan is lower, by far, than credit-card interest, and it’s tax deductible in the same way mortgage interest is.

Once you have the debt moved into the lowest-interest instruments you can find, pay it off as fast as humanly possible.

To accomplish this, make a plan and stick with it. Write down your goals, figure out how to meet those goals, and write down your scheme. Post it on the refrigerator and check off your progress as you go.

The most commonly used plan is called “snowballing.” With this strategy, the debt-ridden consumer quits charging, continues to make minimum payments on all cards, and throws a specific extra payment toward principal on a specific debt. Say you owe on a Mastercard at 8 percent, a Visa card at 15 percent, and an American Express card at 21 percent. You would figure out what you can afford above and beyond minimum payments—suppose it’s $100 a month—and you would pay that toward the card that charges the highest rate. In the scenario above, you’d pay your extra $100 a month on the AMEX card.

As soon as that card is paid off, you take its minimum payment plus your $100 paydown budget and apply it to the next highest-interest card. So, if your minimum payment for the American Express card was $20 a month, you now have $120 freed up to pay toward the Visa card. Once the Visa card is paid off, you would add its minimum payment into your pay-down budget and apply that to the Mastercard. Supposing the Visa’s minimum payment was $15 a month, as soon as that card is paid off, you’ll have $135 a month ($120 + $15) to pay toward the Mastercard.

Your paydown budget is the maximum that you can afford. If you quit charging things and make it a point to live frugally, you may find that amount is a lot more than you expect. And building the paydown budget cumulatively will allow you to clear debt much faster than you may think.

Some people prefer to pay down the smallest debt first, rather than focusing on the debt with the highest interest rate. Psychologically, this is cheering: it feels great to get out from under a debt, any debt. Apply whichever strategy makes sense to you and will help you keep on track.

To “snowballing” you can add “snowflaking”: using every windfall that comes your way to pay down the debt. In this strategy, you apply your income tax return, your annual kickback on the Costco AMEX card, gifts in cash, yard-sale proceeds, income from side jobs, and every other nickel and dime to the debt you’re working on.

So…where do you get the money for that extra $100 or more a month? Two sources are at hand:

• Side jobs and incidental income sources.
• Frugality

Generate More Income

Take on an extra job and apply all the net income to the debt.

About a year before the ax fell, I began to realize the Great Desert University would likely lay off me and all my staff. I had a $30,000 equity loan against my otherwise paid-off house. I did not want to have to deal with that in unemployment, and so I took on an adjunct teaching job at the university’s west campus. At the time, GDU was paying Ph.D.’s about $3300 per class. When they double-enrolled my two sections, I demanded—and got—double pay, earning the equivalent of teaching four sections. Between this amount, freelance editorial income, assiduous snowflaking, and a payment out of my savings, I succeeded in getting rid of the debt by the time the official canning announcement came down.

Most of us can find some paid work on the side. Deliver Away Debt’s blogger Jeff discovered he could earn $1400 to $1800 a month delivering pizzas for 22 hours a week. At that rate, with just the side job money alone, you could pay down a $30,000 debt in about 16 months.

Another source of income is selling things on Amazon, Craig’s List, and eBay. Clean out the closets, get rid of the dustcatching book collection, buy items at yard sales and estate sales and sell them for a profit online.

My neighbors used to run an under-the-table yard sale business. They would spend three or four  months running around to yard sales and scavenging throw-aways from the alleys (you’d be amazed at the perfectly good stuff people will discard!). They’d store the stuff in the garage, and then three or four times a year they would throw a huge yard sale. Over time, they learned how to price the stuff, and they made pretty good money at it.

Live Beneath Your Means

Your “means” is the actual amount of dollars you have on hand today, right now. Not tomorrow. Not next month. Not next year. Today.

That’s the principal behind frugality. Know how much you have on hand to spend, and spend only that. Or better yet: spend less than that—live beneath your means.

Remember, when you pay for something in cash, your dollar buy more because you’re not having to pay a premium in credit card interest. Each dollar is worth a whole dollar, not a dollar less 18 or 20 cents. Weirdly, when you don’t charge things, you have more money to buy things. So, as you can see, it actually pays you money to hold off purchases until you can afford to pay for them outright.

Much has been said about frugal living. Overall, though, its strategies look like this:

• Live light on the land. Distinguish between needs and wants, and purchase and use only what you need.

• Cultivate a minimalist lifestyle. Occupy only the space you need, and fill it only with the objects you need to live comfortably.

• Figure out how much money you can spend and how much you can save.

• Build a budget to manage spending and saving.

• Use it up, wear it out, make it do, or do without. Often you’ll find you already have something that does the job, or in fact you don’t need to replace an item because you don’t really need it.

• Buy things at a discount or don’t buy them at all. If a food or drug item you need is not on sale, buy the store brand, which is the made by the same suppliers that make the expensive brands and is cheaper.

• Eat in, not out. Learn to cook. It’s easy, the food tastes better, and it’s healthier. And by the way, it’s lots cheaper.

• Learn to fix things yourself. It’s not hard to change the oil in your car, and most of us can learn to use a screwdriver and a hammer. While some chores need a pro, many need little more than a few minutes of your time.

• Learn to make things yourself. From household cleaners and toiletries to simple draperies, DIY products save a ton of money.

• Shop at estate sales and thrift stores. Nowhere is it written that everything we purchase must be brand new. In fact, sometimes we can get better products by finding practically unused items second-hand.

Frugal habits can save quite a bit of money—enough that you will soon find yourself spending less than you budget. Use the amount to pay off that debt. Once you’re debt free, use it to live better or save it to live better in the future.