Tuesday, April 26, 2011

How Do You Pay Off Your Debts?

The economic downturn has most of us looking for ways to get on better financial footing. People are thinking of ways, both little and large, to feel safe and out of harm's way.  Most of us are trying to reduce our debt loads or erase them completely. Living without debt and using those former payments to shore up our savings gives us a peace. There are myriad ways to pay off your bills and ten times that many variations. Let's look at three types of debt personalities: Debts First, Save First, and the Debt-Save Hybrid.

If the thought of revolving payments and debt load put a knot in your stomach, you may be a Debts First type of person. DFs are comfortable with a small emergency fund like the plan suggested by Dave Ramsey. Once that emergency fund is in place, the DFs are bound and determined to pay off their debts. They won't rest until they see the final 'paid in full' statement. They exhibit a strong-minded focus and their one goal is to dump the debt. They are willing to sacrifice, scrimp, and scrape together every last penny to apply to debt payments. Their primary asset is the abillity to never lose sight of their goal and maintain the one-track focus that is required to be debt free.

Those that Save First prefer to have a healthy nest egg or emergency fund in place before starting their debt reduction plan. This method is used by people who would rather pay interest charges than live in fear of not having enough funds 'just in case.' Just like the Debt First-type cannot stomach having debts hanging over their heads, the SF's live in fear of being caught off guard. It is that fear that makes them need the bigger savings account as their safety net. What if something happens and there's not enough funds to cover the expense? SFs are comfortable with this plan because it gives them the ability to live in their comfort zone while paying off debts.

There are some people that are a blend of the two types and they are known as Hybrids. The Hybrids have both the need to feel financially safe and pay off their debts simultaneously. This is the category that has the most variations. A Hybrid will find a way to accomplish both goals with little risk to themselves.The benefit to this is the ability to feed both sides of their worrisome equation. For example, a Hybrid may continue making minimal payments on their debt while saving madly until there is enough to pay off a bill completely. The Hybrid will pay off the bill and still have enough money remaining for a small emergency fund. They will start the process over immediately. They keep saving for another big pay off and in the meantime,  that larger savings account gives them a larger emergency fund in case there is a need for it.

Most people will fall into one of these categories based on their own life experiences. By nature, I've always wanted to get out of debt first. My small emergengy fund would catch a lot of small inconvenieces but invariably something bigger would come up and out would come a credit card to bridge the gap between the problem at hand and the money on hand. It was a frustrating cycle. Finally, something happened that made me work on a new plan. I used a small inheritance to become debt free. It was a gloriously, wonderful feeling which lasted 30 minutes. That was how long it took from the time I made the last debt payment and my husband came home to let me know he had been laid off from the most stable job a person could have. Everything turned out okay, but I never forgot that feeling of what could have happened. That was when I realized I needed a new plan that would let me sleep at night. It was a slow process to change from being a Saver First to a Hybrid, but I kept at it.

In the end, it is always a work in progress. We have to find what works and realize that if what we're doing isn't working it is perfectly acceptable and financially wise to fine tune our plan until we come up with one that is effective. No one plan is better than another. Some will save you more money in the long run - if you can stick with it. Some will provide peace of mind. All that matters is that you actually utilized the plan of choice to meet your financial goals. Perhaps your plan differs from these listed here. What kind of plan did you use and why?

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