Step 7-Do-It-Yourself Debt Reduction

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Common Causes of Debt

Debt can happen after an unexpected job loss, upon the birth of a child, or following a major accident that requires hospitalization. Even if you take the best of precautions, such situations may still occur. If they do, this chapter should become your daily reading and guide.

The most common factors leading to excessive consumer debt include:

• Insufficient emergency savings fund
• Uncontrolled spending with credit or store cards
• Excessively large mortgage or car payments
• No written spending plan (aka budget)

DIY Debt Relief

Good First Steps

First, reach out directly to your creditors and ask them to lower the interest rate on your accounts. Any reduction in your annual percentage rate (APR) will lead to a lower monthly payment and less interest paid overtime on credit cards and store cards.

For temporary financial struggles, you might consider contacting each of your creditors and asking them about their own internal hardship programs. Many have short-term options to lower interest rates or suspend even suspend a minimum payment due.

3 Principles of DIY Debt Relief

In order to maximize the effectiveness of your do-it-yourself debt relief program, ensure that you follow these three principles:

1. Use the Avalanche, Landslide, or Snowball to focus on ONE debt account at a time.
2. Make minimum payments on ALL other debt accounts.
3. When you pay off any debt account, move that account’s former monthly payment into the Avalanche, Landslide, or Snowball.

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The Debt Avalanche

Your Focus Account: HIGHEST INTEREST RATE

By focusing your extra payment on your account with the highest interest rate, you will:

1. PAY LESS interest over time than any other method.
2. Pay off your debts EARLIER than any other method.

The Debt Landslide

Your Focus Account: NEWEST ACCOUNT

By focusing your extra payment on your newest account, you will:

1. Build your CREDIT RATING faster than any other method.
2. REBUILD your bad credit score faster than any other method.

The Debt Snowball

Your Focus Account: SMALLEST BALANCE

By focusing your extra payment on your account with the smallest balance, you will:

1. Get an easy, early win that some people need to stay MOTIVATED.

The Debt Cascade

The Debt Cascade takes a little different approach. Even the name seems to insinuate something a little more calming. We developed the Debt Cascade to help cash-strapped consumers make enough progress in their debt repayment to even have the option of choosing between the other DIY debt relief methods.

The Debt Cascade is ideal for consumers who have absolutely no cash available to make extra payments on any focus account. Here are the steps to take in order to build enough of a cushion in your debt payments that you can then move to the Avalanche or the Landslide.

• Month 1: Identify your current minimum monthly payments and set them in your mind as your payments for all future Debty Cascade payments.
• Month 2: Your credit cards and retail accounts will slightly lower your monthly minimum payment because you made a payment in Month 1 and haven’t used your account(s) since. Still, you will make the same size payments you did in Month 1.
• Month 3: Again, your credit and store card(s) will request lower minimum payments than they did last month. You will again make the same size payment as you did in Month 1.
• Month 4: Because your credit and store cards ask you for even less this month, you should have enough of a cushion (perhaps $20 to $50) between your Month 1 payments and your Month 4 minimum payments to allow you to switch to either the Avalanche or the Landslide*, depending on your goals. Congratulations!

*Don’t switch to the Snowball since you’ve already proven to yourself that you can stay motivated for four months.