If the idea of paying off your debt seems overwhelming, consider debt stacking. They say you can eat an elephant one bite at a time. Well, the same concept works with paying off your debt!
By taking into account the interest rate and amount of debt, debt stacking identifies an ideal order for you to pay off your debts. You begin by making consistent payments on all of your debts.
The debt that debt stacking suggests that you pay off first is called your target account. When you pay off the target account, you roll that payment into the payment that you were making on the next target account.
These extra dollars help you reduce the effect of compound interest working against you. As each debt is paid off, you apply the amount you were paying to that debt to the payment that you were making on the next target account.
Debt stacking allows you to make the same total monthly payment each month (in the example above it is $2,567 each month) toward all of your debt and works best when you do not accrue any new debts.
You continue this process until you have paid off all of your debts.
When you finish paying off your debts, you can apply the amount you were paying toward your debt to creating wealth and financial independence.
This example is for illustrative purposes only. The debt stacking concept assumes that:
- You make consistent payments on all of your debts.
- When you pay off the first debt in your plan, you add the payment you were making to your existing payment on the next debt in your plan (therefore you make the same total monthly payment each month toward your debts).
- You continue this process until you have paid off all of the debts in your plan. In the example above, when Credit Card 1 is paid off, the $180 payment applied to Credit Card 1 is applied to Credit Card 2, accelerating its payment to $930. After Credit Card 2 is paid off, the $930 payment applied to Credit Card 2 is applied to the Personal Loan for a total payment of $1,410. The process is then continued until all debts are paid off. Note that the total payment per month remains constant.
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