How to get out of debt, step 5:
Triage all your debts to develop a plan to pay off debt in sequence.
Previous: 4. Detail and list all of your debts.
5. Triage all your debts to develop a plan to pay off debt in sequence.
Ingredients: the results of the previous step, the terms of your loans, credit cards, financing, mortgages, and so forth.
Even though this is still part of the information gathering stage, we will begin to plan our strategy to reduce debt to zero here. Not all debts are created equal. The most important factors are the expenses that are added on to debts the longer they last. Credit card debts, for example, do not carry just high interest rates, often more than %15, but also include late fees. Different types of loans may have different types of interest rates and overdue penalties. In other words, some debts are more expensive than others. And, larger debts will cost more than smaller debts, even if those debts have slightly lower interest rates. 5% of $1000 is $50, while 10% of $400 is $40.
We are going to categorize our debts into three types: most expensive, most pressing, other debts. The most expensive debts are the ones that keep adding additional fees. They are those that have high late fees and high amounts of interest to pay. The most pressing debts are those that must be repaid for other reasons, such as personal relationships. I would include debts owed to people who can cause you harm if you do not repay in a timely fashion. Nobody has the right to inflict physical harm on a person for any reason, but sometimes people in desperate situations will take loans from places they should not. Dealing with these situations is beyond the scope of anything this web site can handle, so in emergency situations as these, the proper authorities should be consulted. But these debts do exist, so we must deal with them in our plan to pay off debt. A third type is all of the other debt which is of a more reasonable amount and have more reasonable terms.
The way to calculate the most expensive debts is to multiply the interest rate by the amount of debt, and thus yielding the amount of interest owed on a monthly basis. If you are incurring late fees, add that to your total. This will tell you how much each debt costs on a monthly basis. What we will do in the action phase is triage which debts will be eliminated first and set a debt reduce order, which debts can be transferred to more favorable terms so that they will cost us less, and which debts we can deal with on a longer-term basis.
Next: 6. Determine how much money you will need to get out of debt.