Plan to Pay Off Debt

Jul 11, 2012 by

Family budget done? Check.

Emergency fund secured? Check.

Family goals and priorities negotiated? Check.

Every family member on board with a laser focus on paying off or down debt (and the sacrifices and lifestyle changes required)? Check.

Okay, you’re ready to launch a serious, sustained debt attack—the only sort of attack that works!

Debt Attack Big Picture

When you first start thinking about paying off a particular debt—let’s say it’s $7,500 worth of credit card debt—you’ll likely be thinking in big picture terms of “I’d like to get this monkey off our backs by next October, before I turn age 40,” or something similar. Then your first question will be: How much would I need to pay on the debt every month to meet this goal?

Ponder this pretty picture for a moment.

 debt pay off graph

This might look complicated, but it’s really easy to use. I’ve done an example to illustrate.

Just pretend for a moment you’ve got a $1,000 credit card balance with an Annual Percentage Rate (APR) of 15%, and you want to pay off the balance in two years (24 months). Using the legend at the right, find the line, by color, for 24 months—lime green, in this example. Ignore the rest of the lines. Look along the bottom of the graph for 15%—your APR. Trace up until you hit the line, then straight over to the left to discover how much you should pay each month: About $47 in this example. Make it an even $50 and you’ll save a little interest expense.

How to Figure the Monthly Payment for Any Amount of Debt

Let’s say the debt you want to pay off in 24 months amounts to $7,500 and has an APR of 15%. The graph tells you the monthly payment for $1,000. Just multiply it by 7.5 to get the monthly payment for $7,500.

→ $47.48 per month x 7.5 = $356.10 per month

Send your creditor $360 (I like to round these up) each month and that $7,500 debt will be vaporized in just 24 months.

How to Figure the Monthly Payment for Any APR and Any Pay-Off Period

There’s a lot of information packed in this simple graph, and it’s quicker and easier to use than any debt payoff calculator, especially for comparing different options. With this graph, if you have any amount of debt and an APR up to 27.5%, you can figure the monthly payment to rid yourself of the debt over a period of time up to five years (60 months).

A couple of examples:

Pay off $12,000 with a 7.5% APR in four years (48 months)

Find the light blue line (for 48 months), and find 7.5% along the bottom of the graph. Trace up to the 48-month line, then over to the left to find the monthly payment: About $24. But that’s for a $1,000 debt, so your monthly payment for a $12,000 debt is

→ $24 per month x 12 = $288 per month

Do yourself a favor and make it $290.

Here’s a tougher one: Pay off $5,300 with a 14% APR in 18 months

For this one, just “eyeball” it and round up your answer, and you’ll be good. A 14% APR is between the 12.5% and 15% APR points, and 18 months would be a bit lower than midway between the 12-month and 24-month lines. Looks to me like a monthly payment for $1,000 of about $60, so your monthly payment on $5,300 should be

→ $60 per month x 5.3 = $318 per month

I’d make it $325 to help assure I reach my goal.

What If You Can’t Afford the Monthly Payment?

This one’s simple, which is not to say easy. You must

  • Cut spending to make room in your budget for the debt payment
  • Increase income (a part-time job or side hustle maybe?)
  • Change your plan and take longer to pay off the debt

or a combination of these options.

Bonus Points

You may have noticed I said above that the imaginary 18-month line would not be midway between the 12-month and 24-month lines, but closer to the 24-month line. As you can see, the lines get closer together as the pay-off term grows from 12 months to 60 months, even though the time span between each period is constant at 12 months. Can you explain why?

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