debt elimination plan

I've read a few of those money management, investments, shares & real estate books - there's quite a few on the torrent sites / scribd.com & I've bought a few (which I think is one way the author's make more money!) and they're always quick to read on flights. most of the time I think they have common sense tips, but I think a lot of people forget these things or get caught up in debt quite easily these days. I wish we'd had more basic money management and money familiarization education whilst at school as it wasn't something I learnt apart from self-study so perhaps my skills in this area have been lacking for a while. it might have been better to start earlier!

I have been following one of ideas which is also common sense, but it has simple steps so is easy for me to do - called Debt Elimination Plan by John Burley. I can't find the book that I found it in - maybe it's in storage in the UK or one of the boxes here at home. anyway, Christopher Suleske has blogged about it on wealthmotor.com (I googled 'payoff priority' and found it).

I have a spreadsheet in google docs with 2006 figures and I've just updated it now, so thought it time to blog about it so I remember to keep track of it. Suleske's blog has example figures in the calculations. he says he can pay off everything in about 7 years. I'm not sure if that's correct, but it has helped me. so in case it's of use to someone else too (be flexible with it and adjust according to your financial situation)

- first I paid off my credit card (I wanted to lower the limit but the bank won't let me)
- I had 3 other loans
- one has been paid off (the smallest), the second is about 50% (which I'm working on now)
- the third I think will take longer - I'm hoping only a few years (3-5 would be good), but we'll see

basically the debt elimination steps are :
- create a spreadsheet (google docs works well) using the fields below, and list all your debts (loans, credit cards, hecs fees etc)

- write the total balance of the debts, and monthly payment amounts in the columns

- then calculate the payoff ratio for each one - to do this, divide the total balance amount by the monthly payment. note this doesn't account for interest etc but it's to work out a ratio so is ok for this purpose

- then write the payoff priority for each. the lowest payoff ratio=priority1 (ie first to pay off), the second lowest payoff ratio =priority2 and so on

- I adjusted the priorities initially due to tax reasons, so work out if you want to do that too (or for other reasons)

- calculate the total monthly payment : TMP=(aa+bb+cc)

- if you can afford it, pay an extra amount ie, TMP each month onto the priority 1 loan, so you're paying extra payments on it

- if you can't afford the TMP amount, try 10% of your monthly salary (calculations are monthly in the spreadsheet, though you might be paying weekly payments to the bank). or some other regular amount that you can afford. basically you want to be paying more than the minimum. I try to pay more than the interest amount so that the loan actually decreases (some months I pay less when there's more bills but then I try catch up later or adjust the amounts to fit my circumstances). this extra payment amount becomes your TMP amount (for the calculations / steps below)

- keep doing this until priority 1 loan is paid off

- then move onto priority2 loan

- the secret here is to not spend the money you've freed up by paying off priority 1 loan (ie spend it on your other loans, not other stuff)

- instead, add this amount to the priority 2 amount so now for priority2 loan, you're paying : (priority 2 minimum payment + TMP + priority1 loan repayment amount)

- then keep doing this until priority 2 loan is paid off

- then move onto priority 3 loan and pay off extra payments on it, so the repayments on this one are now : (priority 2 minimum payment + TMP + priority1 loan repayment amount + priority 3 minimum payment)

- keep in mind that you're still paying off the minimum payments for each of your loans throughout this process ie you're not defaulting on any loans! you're just paying extra into one of the loans at a time until it's paid off

- repeat these steps for all your debts until they're all paid off

- it does seem to work (or help at the very least) if you can afford it & it's nice to watch the debt figures decreasing

Burley suggests you should put another 10% of your wage into an automatic savings plan eg shares (though perhaps not during this market), and also 10% for charity. plus the 10% above for debt reduction (TMP)

- note that the 'payoff ratio' column is actually the number of months it'll take you to pay off the loan. you can make another column for number of years too (payoff ratio / 12) to see this too.

debt name total balance monthly payment payoff ratio payoff priority paid off yet?
loan1 xx aa xx/aa 2 50%
loan2 yy bb yy/bb 1 yes!
loan3 zz cc zz/cc 3

- I write paid off='yes' once done (for positive reinforcement), but I don't write 'no' for those in progress (as it's a negative)

good luck!

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