by Trent Hamm
Available in 24 free installments
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What about debts that are set to adjust in the future? One aspect that often confuses people is how to handle debts that are set to adjust in the future. I generally ignore these adjustments and apply one simple rule of thumb: it's always best to be in the best possible situation one month from now because the future is unclear. You may end up consolidating those debts, or maybe a windfall will come suddenly. Because of that uncertainty, look at the short term when repaying your debts and ignore possible future adjustments - it'll make the planning easier and guide you down a path that, no matter what, is at the very least close to the best possible plan and often is the best possible plan.
Yes, I'm aware that situations can be constructed where it's arguably better to worry about the adjustments early, but given the uncertainty of what may come and also the high level of confusion one adds to the discussion in order to shave off a few extra
Credit cards. Photo by TheTruthAbout....
dollars, it's not worth the speculation. Build a plan - one that's simple, makes sense, and is either optimal or very close to it - and stick with it, and you'll be just fine.
How Do I Use The Plan?
Direct all of your extra payments
towards the top debt on the list. Each
month, make minimum payments on
all of the debts on the list except for
the top one. With that top debt, throw
everything you can at it. Make a double payment or a triple payment or more. This is a
great time to use the snowflaking strategy [93] - whenever you come into a few extra
dollars during the month, due to living cheap or a little unexpected windfall, immediately
apply that cash to the top debt on your list.
When a debt vanishes, cross it off and feel good about it! Over time, you should be eating away very quickly at that top debt, and (hopefully) before long you'll be able to eliminate it. Cross it off the list, celebrate a little, then start hammering away at the new top dog on your list.
When Do I Need To Update The Plan?
Update the list when you acquire a new debt. Whenever you get a new debt, it's going to need to find a place on your list. Stick it in there wherever it belongs based on the interest rate.
Update the list when one of your debts adjusts to a new rate. Whenever a debt of yours adjusts in interest rate, cross it off the list, then add it back in just like a new debt where it belongs based on the new interest rate.
After you do this a few times, it's useful to rewrite the list so that everything remains clear on it, but it's fun to hold onto the old one (with some crossed-out debts) to remember where you came from.
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Build an Emergency Fund
An emergency fund is an amount of money you keep in a savings account that's intended to be used in the event of a major crisis, such as a job loss, a medical emergency, major car damage, and so on [94]. It's a good idea to measure your emergency fund in terms of months' worth of living expenses - you should have a month and a half worth of living expenses for each person you claim as a dependent. So, for me in a house with two children and my wife, I have a six month emergency fund.
For many, a six month emergency fund seems like an impossible goal. So, for now, put that thought aside - it's a very long term goal. Focus instead on putting away a small amount each week [95] , Ask your bank to transfer $20 a week from your checking account to your savings account - and just forget about it until a major crisis hits. Having that cash will make all the difference - it'll keep stress out of your life and make the crisis easy to manage without falling into debt.
Max Out Retirement
By this, I mean you should go to one of those retirement meetings at work, ask exactly how much you should be putting away to ensure that your living expenses are well-covered in retirement, and put that much away. This varies a lot depending on how much you have in right now, how much your employer matches, and so on, so you should talk to your retirement planner at work about the specifics.
