Let’s talk more about debt: our goal is to assess your debt and then work to reduce it. The first half of building wealth is saving with your wealth account. The second half is to reduce your debt. Both of these need to happen at the same time. As part of our business, we have clients coming to us with big plans of increasing their savings and eliminating their debt. The following is one of the proven ways to pay off debt; this plan continues to produce results with our clients.
Here is the 5 step plan:
Step 1: Fill out the debt elimination box, listing everything that is not secured against an asset.
Step 2: The Factoring #
Take the number in column 2 and divide that number by the number in column 3. This is the “factoring number.” Fill in the factoring number for each item.
Step 3: Priority Pay-off Box
Take the debt with the lowest factoring number and list it first. This debt is the first priority payoff. Continue to list the debt in order of the factoring number, with the lowest factoring number debt in first place, the debt with the second lowest factoring number in the next, and so on.
|Order of Payoff||Name of Debt||Factoring #||Min Payment|
Step 4: The Jump Start
In addition to the minimum payment required, you are going to take $200 from your current spending and allocate this to your debt. This will be easier than you think; $200 a month translates into about $7 a day. You should complete a budget at this point. Once you have a budget, you will have a clear understanding of where your money is coming from and where it is going. Budgeting allows you to see where you are spending your money, enabling you to discover items that you could cut down – or even out of – your spending. With a budget, reallocating $200 will not be difficult.
Step 5: Debt Payments
Take the debt listed first in the priority pay-off box and apply the $200 allocation to its minimum payment. Continue to pay the normal monthly payments on all your other debts. Once you have paid off the first debt, continue with the second debt listed, and so on. In this plan, your commitment to making the minimum payments while also adding to the jump start allocation is vital. You must have the mindset that as you pay off one debt, the minimum payments stay within the debt pool and now contribute to the next debt’s payments.
By the time you get to the debt at the bottom – the one with the highest factoring number, which represents the months it should take to pay off the debt based on the original monthly payments – you will now see that you will pay off the debt much faster than the factoring number states.
And just like that, no more dirty laundry!