Tuesday, April 29, 2008

Creating Your Financial Plan- Step Two

Yesterday we created step one of our financial plan. This was our plan to make an emergency fund so we could do without our credit cards from now on. Today we are going to work on step two, which is to pay off any debt you may have. (This does not include the mortgage if you have one.) Get out all of those credit card statements and let’s get started.

Let’s look at Step Two of Julia’s Plan

Step Two- Pay off Credit Card and Other Debt
Goal- Pay off all debt and stay out of debt for good.

Plan- Current Debts

Visa Card Total Owed: $5000 Minimum Payment: $200

Car loan Total Owed: $20,000 Minimum Payment: $400

Student loan Total Owed: $20,000 Minimum Payment: $150

Totals: Total Owed: $45,000 Minimum Payment per month $550

(This should actually be stacked to make it easier to add up but blogger does not allow that type of formatting, sorry:)

Add $75 to Visa Card payment now that Emergency fund is complete. Once Visa Card is paid off continue to implement Snowball by paying the $275+$400 ($625) on car loan. Once that is paid off continue with student loan. Any tax return money will go to debt also.

Possible completion date: 2014 – Probably sooner due to raises etc.

Maintenance- Continue with Step Three to stay out of debt for good.

The goal is simple. She wants to pay off her debt and stay out of debt. I am not advocating a certain method for paying off your debt. You can do this however you see fit. In this case Julia plans to use the debt snowball. She takes the money she had used to save for her emergency fund and adds it to the first minimum payment. Now she is paying over the minimum so it will be paid off sooner. For more on the debt snowball click here.

I like listing each debt and the monthly payment so you can see how much money is going toward debt each month. For me it is over $700 a month. I keep thinking to myself that once that is all paid off I will have an extra $700 a month just floating around. Won’t that be great? Now, back to her plan. You see she has listed out exactly how she plans to take care of her debt. You should do the same. This step is also pretty detailed because she is not far off from beginning it.

As for the completion date here she can probably finish this much sooner, but to get your own date take your debt total and divide by your monthly payment (hers is actually $625 adding in the $75 from step one). This will give you a number of months. Divide that by 12 and you will have the number of years it will take. This is just an approximation. It would take longer if we factored in interest, but if you are really grabbing every cent you can find and putting it toward your debt it will probably be pretty close or hopefully over your actual date of completion (again, if you have a lot of debt and don’t want to know…skip it.)

Finally, I am glad you have made it this far, but if you aren’t writing any of this down you are wasting your time. Start making your plan now, and join me tomorrow to discuss step three.

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