After foreclosure: paying off debt
Steps you can take now to pay off debt.
August 26, 2015 - Author: William V. Hendrian, Michigan State University Extension
If you have experienced a foreclosure or other financial crisis, you may be in the process of picking up the financial pieces. One area of focus may be paying down or eliminating debt in order to stay on track with your credit rebuilding process.
Where do you start? First, set a smart goal to pay down your debt. Smart goals are specific about what you want to do and measure progress toward success. A smart goal to pay down debt will be realistic and achievable and you should set deadlines to reach certain dollar amounts or to pay off a particular debt altogether. This will help you keep track of your progress. Once you have a goal for debt reduction, it is time to make a plan to achieve the goal.
A spending plan will help you discover the money needed to pay off your debt. You can find help making and managing a spending plan by following the link. To summarize, track your spending using your checkbook, saving receipts or writing down what you spend in a notebook. It does not have to be fancy. Identify expenses that are the same every month, and identify expenses that seem to vary month-to-month. Next, calculate your expected monthly income and subtract your expenses to determine how much you have left to attack the debt. A few methods of paying down debt include: making a “Debt Snowball,” paying the highest interest rate debts first, and making “power payments”
To make a “Debt Snowball,” list your debts from smallest to largest. Pay the smallest debt off as soon as possible using any extra cash that you can find to pay it while maintaining the minimum amounts on the other debt. As the debts are paid off keep applying the extra cash to the next debt until all of your debt is eliminated.
The Highest Interest Rate method is to prioritize your debts by interest rate on loans or credit cards. You apply any extra cash toward the payment of the highest interest rate debt. The idea is to save money on interest by paying off these debts first. After you have paid off the debt with the highest interest rate, move to the next adding in any extra cash.
Power payments can be made using either of the above methods. A useful tool found on Power Pay, a Utah State University Extension website helps you to keep track and make estimates in regard to your chosen path. You can also find help understanding time and interest savings associated with your choices.
Regardless of the method, even a small payment, as little as $5 makes a difference. It is important to make a plan and stick with it. If you would like more information about money management classes or homeownership, Michigan State University Extension offers a variety of money management programs throughout the state of Michigan. In addition, Michigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at MIMoneyHealth.org.