Paying down debt for your future

Let’s jump ahead in time for a moment, and visit your ideal financial future, five years from now. Your credit card balances are nonexistent, your debt-to-income ratio is low, your credit score is high, and you feel completely secure about your management of your finances.

Got it? Good. Now, it’s time to dig in and get yourself there.

In last week’s column, we came up with a few goals for your debt. Now, let’s look at your expenses, and see if we can reroute some of that money toward your goals.

First, let’s cordon off your basic needs. You calculated your total minimum debt payments per month last week — let’s subtract those from your monthly income.

If your housing expenses aren’t included in this figure, subtract those too. You’ll need gas to get to work, and you’ll need essential food and household items. You can find these amounts by looking at your last month’s statements. If you usually pay in cash, try a rough estimate now, and start writing down your cash expenses for the next 30 days.

If you’re saving for an emergency fund, include that in your basic needs. Without an emergency fund, you’ll end up relying on your credit cards, and you’ll be right back where you started.

Once you’ve subtracted your basic needs from your monthly income, you’re left with your personal discretionary fund. This is the money that you can channel toward your debts.

Commit a portion of your income to your debt payment goals.

If you want to fast -track your debt payoff, use most of this discretionary money to pay down your debts. You’ll have to adjust to a new, far more basic lifestyle, but you’ll pay off your debts and reach your ideal Debt to Income Ratio that much more quickly. You’ll also get used to living below your means, which is exactly what you need to keep yourself out of debt for the long run.

If easing into a change in habits is better for you, try committing a percentage of your discretionary funds toward your debt. You can gradually increase your debt payment percentage as you decrease the amount you spend on discretionary items.

Pull out your debt spreadsheet from last week, and look at your “Time until Payoff” targets. You can use the monthly payments associated with these targets as your guide, in deciding the monthly portion of income you want to use to pay off your debt.

Once you commit, commit for good. If you re-negotiate the amount you pay every month, it’ll be easy to slip back down to payments at your minimum levels — and when you do that, you’ll have that debt on your books for years. Stick to your targets, and you’ll reach your goals.

Find additional sources of income.

After you’ve pared down your budget and you’re still not making as much headway as you’d like, it’s time to look for more money elsewhere. Think about your skills and the time you have available.

Could you handle a part time job over the weekends? Can you give lessons or provide services after your normal working hours? If you take on temporary work while you’re paying down your debt, you can increase your debt payments and stash away savings.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 18 years experience in retail banking and with financial institutions in Guam and Hawaii.

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