USING YOUR BUDGET TO PAY OFF YOUR DEBT

Discretionary income is the money you have left after you've paid all the bills that you have to pay - the Total Money Remaining fgure at the end of your budget worksheet. This money is the income that you use at your discretion for "extras," from treats to investing - unless you're in debt.

Think of paying off high-interest debts as steps toward improving your future buying power. Nothing eats into your financial potential like a high interest rate.

This implies that you’re paying attention to the interest rates you’re paying. If you’re not, now is the time to start. Finally, consider consolidating your debt through lowerinterest vehicles. Let’s take a look two of the most popular. Debt-consolidation loans .Here’s the way these loans work. A lender, most typically a bank, lends you enough money to pay off all your debt. The interest rate charged by the bank can be substantially lower than that for the debt you just retired, resulting in potentially significant savings.
Debt-consolidation loans help in another way. In many cases your payment to the bank is a fixed amount, rather than discretionary. That promotes discipline.

Several cautionary notes on debt consolidation. Beware of banks or other lenders that promote consolidation without offering you a lower interest rate. There’s little value to debt consolidation if your interest rates aren’t reduced. Also, once you’ve used your consolidation loan to pay off your credit-card debt, the best thing to do with your credit cards is destroy them—particularly those that charge exorbitant interest rates. Cut them up, have a plastic parade to manage your debt effectively, do anything you want with them—except preserve them. If you hang onto them “for a rainy day,” the temptation to incur new debt with credit-card purchases may prove irresistible.

If you stick to your budget, you will free yourself of credit card debt. That's the good news. The even better news is that your other debts, such as auto loans, student loans, and a mortgage, will also be shrinking as you stick to your budget.

Some types of loans, such as mortgages, assess a prepayment penalty if you pay off the loan early. Make sure to read the print on your loan agreement before you end up costing yourself more than you're saving!

If any debts remain after you pay off your credit cards, decide what your next-costliest debts are (perhaps a car payment or an installment loan for a large appliance). Your best bet after paying off credit cards is probably to pay off items that can be repossessed. Simply follow the same procedure for these debts as for the high-interest credit card debts, described earlier in this chapter: Continue to choose the debt with thehighest interest and put as much of your discretionary income as possible toward that debt. As you pay off debts, remember to update your budget and reallocate your resources.

Even if you're close to that 25 percent debt figure, you may want to get your ratio of debt to income even lower. Just stick to your budget, don't add to your debt, and you can reach your goals.

top