To proceed from my financial wellness post from yesterday, I want to share a simple formula for applying your excess spending and paying debt or adding to savings.
After finding the excess in your budget and really allocating it out, the quickest way to pay off debt is to stack your outstanding debt from smallest to greatest. Take the excess spending that you have located in your budget and apply it to the smallest total owed until it is 0.
Paying Debt Faster for Financial Wellness
An example is: $270 trimmed from budget
$500 10.00 minimum
$1000 15.00 minimum
$1200 20.00 minimum
$3000 75.00 minimum
$5000 150.00 minimum
Continue to save and cut excess spending and apply the money to the second smallest bill next. And so on and so on.
Reduce the Amount of Time in Repayment Mode
Instead of spending years chasing the minimum on debt, really step up your payments and knock your debt out much faster. In the above scenario, the repayment plan would knock out the debt in 1 year and 3 months.
As your consumer debt decreases you can continue the plan paying off car loans and mortgages.
If you are already debt free, the same idea works well to start savings for an emergency fund. Ideally saving for 1-6 months of living expenses saved for emergencies, and on and on as you build wealth and investments.
I just wanted to share some tips on financial management. Having this tool is a nice, clear-cut method of repayment without having to increase your immediate income. It is also a nice way to reallocate your budget if you have had a reduction of income.
If you have any suggestions or methods that worked for you, please post in the comments below. I am always happy to share what I know, but I also love learning.