Henrik speaking at a conference

Hi, I’m Henrik Joreteg

Mobile web consultant, developer, and speaker

posts | twitter | email | hire | book | my startup: Xchart.com

Action Plan: Get out of debt

Slavery may have been abolished with the 13th amendment, but millions of Americans are slaves to their debts. The crazy part is that they signed up for it themselves! Until you’re free from your unproductive debts, you’re not free.

Nothing sucks the life out of you like unproductive debt. As will be discussed in other posts, not all debt is bad. However, odds are pretty good that most personal debts that you have are tying you down, limiting your options, exposing you to too much risk and eating up your paycheck. A good rule of thumb is: Unless the loan helped you buy something that is making you money or you can safely earn a better interest rate than what you’re paying, you should never have gotten that loan and you should pay it off A.S.A.P.

One of the best things you can do for yourself is to start getting rid of those bad debts.

To do that successfully, you need a strategy. Many people just try to randomly throw any extra money they can at all the various loans that they have. That approach is tiring, overwhelming and makes it hard to see progress. And frankly, without progress, people give up and stay trapped in debt.

There is a best way to do this. Let’s take a look at an example:

Assume you have the following 5 loans:

Car Loan 6% $15,000 MasterCard at 10% with $4,000 Student Loan at 4.75% $43,000 Visa Card at 19% interest with a balance of $2,000 A Loan from BestBuy at 7% for $3,500 (you bought a big plasma TV you couldn’t afford.)

Where do you start?

You only have so much each month to put toward your loans. So, the trick is to make it go as far as possible.

Step 1: Order them by Interest Rate List all your loans starting with the highest interest to the lowest. It doesn’t matter whether the balance is $20,000 or $50. Put them in order of interest rate.

Continuing with our example our list would be rearranged as follows:

19% Visa Card 10% MasterCard 7% BestBuy loan 6% Car Loan 4.75% Student Loan

Step 2: Work out your budget Figure out just how much of your earnings you can put toward your loans each month. For our example let’s say you have $2000 each month to put toward your loans.

One of the best ways to ensure that you have enough money to pay your loans is to make the payments right away when you get your paycheck. This way you spend what’s left instead of what’s using what’s left to pay back your loans.

Step 3: Target your first loan Now, pay minimum payments on every loan except for the first one on your list. Do NOT pay any more than minimum payments on any of your other loans. All your extra payments should be put exclusively toward the loan with the highest interest rate. Otherwise, you’re paying more interest than you need to.

Notice that interest rate is the only thing that matters here. No matter what the balance is on your other loans, only pay minimums on your other loans. But go crazy on your first one. Get that sucker paid off!

Step 4: Knock-em down Here is where you’ve got to stay strong. Once your first loan is paid off, now you may feel like some of the pressure is off and you can relax a bit more. That will screw up your plan.

If you’ve gotten this far, you’ve already proven to yourself that you CAN put a certain amount of money each month toward your loans. So don’t stop doing now, this is where you can really start seeing fast progress!

Now you simply add the entire amount you were putting toward the first loan to the minimum payment on the second loan on your list. Continue this pattern way until you’re out of debt. This will ensure that you pay the minimum amount of interest necessary and get out of debt as quickly as possible.

A few more thoughts As you start paying off your first couple of loans you’ll get to the point where you’re putting a LOT more than the minimum payment toward the loan that is now at the top of your list. It may be tempting to spend some of that money. But, paying more than minimum payments is the only way to make significant progress. In fact, in some cases, like high-interest credit cards, you won’t EVER pay it off with minimum payments. Some loans are designed to keep you in debt forever. When you’re making big payments you’ll see progress and you’ll have the satisfaction of knowing that you’re paying the least amount of interest possible.

Now’s the time to start getting out of bad debt and stop buying stuff on credit. If you can’t pay it by the end of the month and it isn’t going to help you make more money, you have no business buying it! Be less stupid next time, live below your means. It’ll change your life.