Auburn, Alabama — While the current drought has admittedly affected people differently, one important task for farmers is getting out of debt.
Theresa Jones, a regional Extension agent in Family Resource Management & Workforce Development offers some debt reduction strategies that you can put into practice quickly, easily and on your own.
Ways to Reduce Debt
Most efforts aimed at eliminating debt can be summed up in two primary goals: (1) time (getting out of debt as quickly as possible); and (2) saving money (paying as little in interest as possible). While there are numerous ways to work on these goals, here are some simple steps that will provide dramatic results.
Make Level Payments
Think of this as the anti-credit card payment. Credit card companies allow you to reduce your required payment as your balance decreases. A level payment suggests that you pay your current monthly payment (whatever that is) steadily until the debt is paid off.
If you have a balance of $5000 with a 15 percent interest rate and make the minimum payment of $150, this payment equals 3 percent of your balance. It would take 16 years five months to pay this debt and you will have paid more than $3,400 in interest. Below is an example of decreasing minimum payments.
By not reducing your monthly payment as the balance decreases, it would take you only three years and eight months to pay it off and cost you $1,500 in interest.
PowerPay, developed more than 15 years ago by Utah State University Extension, is a systematic way of repaying debts. This debt reduction system is commonly referred to as a snowball method of repaying debt.
To use this method, make level payments on all debts and accumulate no new debts. As one debt is paid off, roll over that money to a new debt until all are paid in full.
A benefit of this program is the flexibility to decide how to apply the extra payments (as debts are paid off). Should you pay the highest interest rate to save the most money? Or should you pay off the lowest balance, which may enable you to stick with your debt reduction plan better? The Power Pay program gives you each scenario, and you can choose the method that works best for you. The time and money saved using this system of repayment is often breathtaking. The PowerPay calculator is available for free at https://powerpay.org.
Generate Extra Income
Selling equipment that is no longer being used can help you gain funds to put toward debt and remove clutter from your property. This is a great way to unload all unwanted items for the purpose of gaining profit. During down time, take inventory of the unused equipment to sell. Sometimes it is difficult to let things go but if it is taking up unnecessary space, get rid of it. Consider having a yard sale or sell items online. Make sure you stick to your goal by applying any funds generated toward your debt.
In addition, it does not matter if you are trying to get out of debt quickly or gradually, remember to avoid creating new or unnecessary debt, especially during a disaster. Create a plan and stick to it. If you do not work the plan you set in place, you defeat the purpose of becoming debt free. Everyone should have a goal to become debt free at some point in life. Recognizing the need to get out of debt is the first step to having financial freedom.