Save Money with Simple Debt Management Plan
Find Financial Freedom without Resorting to Loan Consolidation
Sep 26, 2009
It starts simply enough, a credit card balance here, a bank line of credit there. Soon debt starts to pile on top of debt with interest and fees. Monthly payments seem to be a matter of just paying the finance charges and trying to pay debt down and save money becomes impossible.
Stop. There is hope. With a simple debt management plan, determination, a consistent effort and some patience, anyone can get out of debt. Before things get completely out of hand and loan consolidation becomes necessary, try this simple plan for debt reduction.
Pay Debt Regularly to Gain Financial Freedom
Finance charges on credit cards and bank loans are usually compounded (calculated) daily and charged monthly on the statement. In the case of credit cards, the calculation is made on the average daily balance of the card and multiplied by the number of days in the billing period (usually 30).
In the case of bank loans, the interest may be compounded and charged daily, which means that fees are actually charged on interest that has been added daily to the balance of the loan. Waiting until the end of the month to pay the bill means that the interest has built up to the point that most of the payment is going to interest.
The answer is pay debt regularly. Debt reduction is much more difficult when most of the monthly payment is going toward interest. Waiting to pay when the monthly statement comes in may not be the best method.
Debt Management Plan for Faster Debt Reduction
The first step in debt management is to reduce the interest rate whenever possible. Call credit card companies and ask them to reduce the interest rate. They may or may not do this, but it’s worth a try. Even one or two percentage points will help, especially if the credit card balance is high. Bank rates are usually fixed, unless the loan is on a variable rate, so it usually doesn’t do any good to call.
So, here’s the plan. Take each credit card or bank loan and determine the monthly payment. Always pay more than the minimum payment on credit cards if possible. Try to at least make sure the payment on the balance is equal to or double the interest charged. In the case of bank loans, just take the amount owed.
Divide the amount owed by four. That is the new WEEKLY payment. Sounds crazy and too simple? Here’s an example. A $46,000 bank loan at 7.59% has a monthly payment of $397 with interest compounded daily at $9.57 (this reduces as the principal balance reduces but for now, just go with this figure). The total monthly interest for 30 days is $286.96. So the monthly debt reduction from the $397 payment is only $110.04.
However, pay that same loan at $99.25 per week. The interest is now being paid weekly and not allowed to accumulate. There’s no interest on top of interest. At $9.57 per day the weekly interest is $66.99, times four weeks, equals $267.96. Now the monthly debt reduction is $129.04.
Get Out of Debt and Save Money
By paying weekly there will be four extra weekly payments made in the year, 52 weekly as opposed to 12 monthly. Basically that’s one extra monthly payment per year. As the principal balance goes down the interest goes down, both at a rate faster than paying monthly.
This method is a way to not only get out of debt faster, it also helps prevent identity theft and can provide a payment cushion. If making a weekly payment is difficult at one point, skip it. The downside will be that the interest will build during that two weeks of non-payment and “catch-up” will take a few weeks. However, by then the payments should be far enough ahead to not incur any actual bank penalty. Just don’t go another week, or payments will fall behind.
Before starting this plan, be sure to check with the bank to make sure there are no prepayment penalties on the loan and that they allow weekly payments. Credit cards usually don’t have prepayment penalties, although some cards will only allow a certain number of payments per month so be sure to check that. The result can save money and open the doors to financial freedom without having to resort to loan consolidation.
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