So you have some debt, congratulations, you are just like everyone else. Debt, is broken down into two categories: Good Debt and Bad Debt. Good debt for example, would be taking a mortgage for which you have multiple tenants paying the rent and some extra on top of the mortgage and expenses I.e., your mortgage and expense payments on the property are $1200 a month, you are renting out a house that is 2 storey’s and have someone living in the basement, main floor and the top floor each paying $500 or even more a month. Thus $500 X 3 = $1500. This my friend, is good debt. Because the debt is helping you make money ($1500 in income – $1200 in expenses = $300 a month in profit. Now if you are smart, you have incorporated and are claiming that as revenue and being taxed at the corporate rate which is substantially lower than the earned income rate (in Canada and the US at least). Bad debt, are the usual products you are accustomed too: credit cards, mortgages for house(s) that only you live in, loans (especially student loans), lines of credit etc. Click for more on Credit Card Payment Terms according to Financial Consumer Agency of Canada (FCAC), you can also try their Credit Card Repayment Calculator. You may also check on the back of your financial statements for your credit cards, some of them outline your payments, the interest and how long it will take to pay the balance off it you make the minimum payments.
The article I am initially referencing talks about some of the pitfalls of getting debt consolidation – combines all your debts into one and make one payment instead of multiple. Although the article mentions some things to keep in mind, I would strongly recommend not getting a debt consolidation at all. Some say that it is more convenient to have one payment and so on, my advice to that kind of thinking: Grow up and get organized. These are your finances, be responsible for them.
Here is the method I am using, I read about it in the book: Cashflow Quandrant – Robert Kiyosaki check it out on Amazon, iTunes, Chapters.
Robert advises his readers to learn by properly managing their debt. He suggests things like making a calendar event each month outlining your payments and for how much, this is really helpful if you have online billing/banking to see what your payment is in advance, as well as allowing you to write the event in your electronic calendar for consistent reminder.
Roberts’ method:Â Say you have several different debts:
Car loan $1000 (left over), credit card1 $2000, credit card2 $5000. Total debt: $8000
Payments (est): Car loan: $120/mo, credit card1: $50/mo, credit card2: $100/mo. Total payments: $270/mo.
Robert notes that you should be out trying to find any creative and legal way to “create” extra money. This could be a paper route, doing some yard work, checking out work on TaskRabbit or whatever, but find a way to make an extra $200-$350 a month. Not only is this extra income, it gets you thinking creatively and really putting your skills to work while also adding experience to your resume and if nothing else builds some good references.
Ready for this part? It may seem a little strange. Pay all the minimum payments on all your debts… then, take that extra $200-$350 a month and apply it to your smallest debt size. This will increase your momentum and help you feel a sense of accomplishment and increase your desirability to pay off the next one and the one after. Sometimes, taking the numbers out of the numbers is helpful. So lets look at it:
Not including your interest, just taking the $270/mo would take you 30 months to pay off $8000 (assuming a lump sum divided by monthly payment approach). That also assumes you accumulate no additional debt in the interim. Kevin O’Leary in his book Cold Hard Truth On Men, Women and Money suggests putting your cards in a small container with water and freezing them. Then when you want to make an impulse purchase you’ll have to wait for it to thaw.
So your Car Loan which has a monthly payment of $120 on $1000 balance will take 8.3 months. Now lets add say the $200 added on top of your $120/mo. totaling $320/mo. $1000/$320 = 3.12 months (the fourth month would be a much smaller payment).
Credit Card1 = $1800 balance (paid $50/mo while paying the loan) and a $50/mo payment (min). Now here is the trick, taking the additional $320 you have extra. You are still making the extra $200/mo, which is hopefully part of your routine now, and taking the $120 payment from your loan and applying them both to credit card1. $1800/mo divided by $50/mo payments (again not including interest) would take you 36 months (3 YEARS)! But don’t forget, you have an extra $320! So now your combined payment is $370 a month. $1800/$370 = 4.86 months. Thats 1/7th of the time! And hundreds if not almost one thousand in interest.
Credit Card2 = $4200 balance (paid $100 during the 8 months of paying off other bills) and a minimum payment of $100/mo would take an astounding 42 months… nearing 4 years! And finally you have substantially larger payments now… your payments now is $370 + $100(previous credit card1 payment) = $470/mo.! Take the $4200/$470= 8.93 months.
So at the beginning, and using a lump sum payment method (which typically isnt the case – unless you are using a debt consolidation) would take you 30 months… If you take just Credit Card2 at $5000 or even the $4200 and $100 balance, that would be 50 or 42 months depending on when you calculate the payment from. You are verging on literally, half a decade, HALF A DECADE!!! The method outlined above would take you 17 months! Just under half the time if you used a debt consolidation method. Which again, could save you thousands, and even more if you were to just pay the minimum amounts.
Personally, I am working on this method, and have done a little bit extra, I increased the payment of my loan 3X. I also did some work for a company for a couple days and earned $350 (which is my monthly “created” money). So I have narrowed down my debt repayment time to a fraction, by tripling the payment size, I now work hard a finding extra shifts at my current job, and applied for another. This has a three fold benefit, it will provide a second source of income (I call diversified income), will allow me to more easily cover my expenses by expanding my means – not living below them, and most importantly will allow me to increase the amount of money I am saving each month, currently at about 20%. I firmly believe that poor people are poor because they continue to use their savings and investments to pay off their debts, then they get back into debt. I refuse to do this.
Avoid These 3 Pitfalls of Debt Consolidation:
http://www.goodfinancialcents.com/avoid-pitfalls-of-debt-consolidation/Â
FCAC Credit Card Payment Calculator
http://www.fcac-acfc.gc.ca/iTools-http://www.fcac-acfc.gc.ca/iTools-iOutils/CreditCardPaymentCalculator/CreditCardCalculator-eng.aspx
What are your thoughts? How do you work on paying off debt faster? Sounds off in the comments, hit share, and subscribe! Thanks!
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