How To Pay Off Debt Fast Using The Stack Method MONEY

BY CRAIG DEWE

Just cause you can buy it doesnt mean you should.

Whether it’s consumer debt on credit cards, student loans or a mortgage, most people find themselves weighed down by debt at some point in their lives. This can keep us working jobs we hate just to pay the bills and keep our heads above water. By learning how to pay off debt fast you can release this burden and remove some of the stress from your life.

Today I’m going to show you how to pay off your debt as fast as possibleusing the Stack Method.

Step 1: Stop Creating New Debt

Most people do not receive training in handling money and how to live within their means. If you’re in debt then you’re probably one of these people and it’s time to bite the reality bullet. It’s going to be impossible to get out of debt unless you retrain your financial habits right now.

You must make a stand against all the marketers trying to take your hard earned money or offering easy finance. You don’t need more stuff to make you happy. What you need is financial peace of mind.

So cut up your credit cards or freeze them. I mean this literally. Put them in a container of water and stash them in your freezer. Then when there’s an opportunity to spend, you have time to thaw out (you and the credit cards) and really decide if you need that purchase.

Step 2: Rank Your Debt By Interest Rate

Make a list of all your debt with amounts and the interest rate. The highest interest rate should be at the top as this is what you’ll pay off first. Paying off your high interest debt is the key to the Stack Method and paying off debt as fast as possible.

Interest is a powerful weapon and right now the bank or other financial institutions are using it against you. Interest significantly increases the amount you need to pay back and often we’re completely unaware of how much that is.

For example, if you have a $10,000 credit card debt at 20% interest where you pay a minimum payment of $200 a month, you will end up taking 9 years and 8 months to pay off the actual amount of $21,680 including $11,680 in interest!

Step 3: Lower Your Interest Rates

You can often lower your credit card interest rates by doing a balance transfer. This means moving your credit card to another bank and they will lower the interest rate to get your business. Shop around and try to get the lowest interest rate for the longest duration (preferably until it’s paid off completely).

Just make sure you’re reading the terms and conditions carefully so you don’t get stung by the new bank in other ways. Once you’ve done this you can order your list of debt again if things have changed.

Step 4: Create a Strategic Spending Plan

This is where we improve on your financial control from Step 1. Take a piece of paper and write down your income after tax and all the expenses that you have. This will include the minimum payments on all your debt.

Look at your expenses and then rank them in order of importance to you. Look at the items on the bottom of your list and decide whether you’d rather have them or be financially stable. The objective is to create a Strategic Spending Plan where your expenses are lower than your income.

You also decide how much you are willing to spend on each area of your life. You can allocate amounts for rent, groceries, eating out, buying clothes and other activities however realize that once you’ve spent your allocated money there’s no dipping into other areas. It also helps to have a Fun Account that you can spend on what you like and an Emergencies Account in case your car breaks down etc.

You also want to include in your Strategic Spending Plan as extra amount you’re going to use to pay off debt. Can you afford $20 a week? $50? $100? $200 or more? It’s important that you get a realistic number that you can commit to each week without fail and this is your Stack Repayment.

Step 5: Create a Repayment Schedule

The first part of the Stack Method is to cover the minimum payment on every single debt you have. Any time you miss a payment, you incur fees and these add up quickly. This also includes making the minimum payment on the debt with the highest interest rate.

Then for the debt with the highest interest rate (your Target Debt) you’re going to add the Stack Repayment from your Strategic Spending Plan. You apply this Stack Repayment and the minimum payment until that debt is paid off in full.

As your official minimum payment decreases you add that extra amount to your Stack Repayment. So as your minimum repayment drops your Stack Repayment increases equally. This will compound how fast you pay off the Target Debt by adding even more to the repayments you’re making.

Step 6: Reward Your Progress

You want to track your Target Debt so you can see your progress along the way. You can also decide on milestones that you’re going to celebrate and reward yourself on. A reward doesn’t have to cost money but if it does then it comes from your previously allocated Strategic Spending Plan.

This is an important step as it will keep your motivation going when you feel your willpower fading. Just like you’ve trained yourself to brush your teeth and shower, you can train yourself to manage your money. Feel great that you’re now entering the 10-,20% of people who are actually responsible with money.

Step 7: Compound Your Results

Once you pay off your Target Debt you have a huge celebration and congratulate yourself. Then you move the Stack Repayment (which includes the previous minimum payment as well now) to the next debt with the highest interest rate. This becomes the new Target Debt and you are using your Stack Repayment amount plus the minimum payment for the new debt.

This is why the Stack Method is so powerful. As you decrease a debt you actually increase your Stack Repayment amount. This means the second debt will get paid off even faster, the third even faster than that, and so on and so on until you are completely debt free.

Step 8: Be Kind To Yourself

During this process your resolve is going to be tested multiple times. Maybe you’ll have an emergency like your car breaking down or the need to travel for a sick relative. The important thing is to not throw up your hands in despair while going back to your old habits.

Life will test your commitment to your new responsible money attitude and it’s up to you how you respond. When things go wrong (and I guarantee they will) you need to shrug it off and get back on track. Show compassion when you accidentally go over your Strategic Spending Plan and decide to do better next week.

Now You Know How To Pay Off Debt Fast…

The Stack Method is a powerful tool but it’s up to you whether you use it. If you really want results then print out this article immediately and start working through the steps. It’s only by the decision you make right now that you will enjoy a debt free future and live a financially responsible life.

Advertisements

Tips On Getting Ahead With Your Finances – New Financial Year Goals

small-business-lending-nov

For most households July 1 dawns with barely a cross on the calendar. But just as January 1 prompts many of us to take a pulse check on our health and resolve to do better, the new financial year is the perfect time to take stock of our fiscal fitness.

Build a budget

It’s easy to lurch from payday to payday and bill to bill in the hope there’s more money coming in than going out. The best way to manage your money and ensure you are not living beyond your means is to set a budget and stick to it.

Building a true budget requires honesty with yourself about how much you actually spend. Consider all of your costs for an entire month – groceries, bills, loan repayments, clothing, coffees, school fees, entertainment and everything in between – and stack them against what you earn. If you find there is little left over or worse, nothing at all, it’s time to cut costs.

Consider expenses you can control versus those you can’t. Loan repayments, school fees, rent or council rates are fixed. But take-aways, movies or a new pair of heels are all at your discretion – and where you can cut back.

Axing one takeaway coffee from your work day can net you nearly $900 a year, while making your own lunch can save more than $1,800. Pare back on impulse purchases and eating out and your annual savings could soar.

Set some goals

Nothing spurs savings like something to look forward to, such as a holiday or even a deposit on a home. Build your savings goal into your budget and set funds aside as soon as you get paid. Better still, have funds debited from your pay into an account you can’t access easily, such as an online savings account.

Pay down debt

The new financial year is the perfect time to assess debt and make a plan to reduce it, starting with those debts with the highest interest. Consumers often make the mistake of paying extra off their home loan while carrying high-interest debt (up to 20 per cent per annum) on their credit card. You will be far better off financially if you clear the high-interest debt first. A $5,000 credit card debt at 17.5 per cent, for example, attracts $850 in interest a year, while the same amount on a 4 per cent per annum home loan costs just $200 in interest. Credit card providers must now outline to customers how long it will take to pay off their debt if they pay just the monthly minimum. Check out the numbers on your next statement and take steps to pay as much off as you can.

Organise your deductibles

Start the new tax year by knowing what you can deduct and sorting your receipts. Australian income-earners are entitled to minimise their tax so find out what you are allowed to deduct in your line of work and keep a record of all relevant receipts, even if it’s just in an envelope or folder. If unsure of what you can claim, visit ato.gov.au or talk to your accountant.

Get savvy with your super

If you are at a point in life where you have extra disposable income, it may be worth socking more into your super. Talk to your tax advisor or accountant about your individual circumstances and how much extra you’re allowed to contribute. Superannuation is reported after the end of each financial year so keep an eye out for your next statement in coming months to see how your retirement fund is faring.

Make sure you are covered

Insurance may be considered a grudge purchase but it could be the difference between financial ruin and getting back on your feet if the worst happens. Check your home and contents policy to ensure you have enough cover to rebuild and replace your possessions in the event of a total loss. Many home owners make the mistake of just taking out enough building cover to repay their mortgage, but the sum insured should cover the cost of rebuilding your home at today’s prices, including any landscaping and fences. Similarly, contents insurance should be sufficient to cover all of your belongings if you have to buy them again as new. If you have an investment property, make sure you have a specific landlords’ policy to cover claims for loss of rent or tenant damage (see our article about managing unruly renters in this edition of Haven), which are not covered on standard home policies.

Mortgage matters

The new financial year is an ideal time to review your mortgage, regardless of how long you have been with your lender. It never hurts to look around at other institutions and their loans to ensure your mortgage is still structured to suit your circumstances. Even 0.5 per cent shaved from a $250,000 loan will save more than $23,000 over 25 years.

Talk to your mortgage broker about your financial goals and circumstances for this financial year so they have enough information to help you determine the right loan for your situation.

* Tax information: the information in this article does not constitute advice. As taxation legislation is complex, we recommend you speak with your financial advisor, tax advisor or contact the ATO for further details and expert advice regarding your personal circumstances.