Monday, December 7, 2009

This post is for the 4 people who asked a question about this. First, I apologize for not replying sooner, as I quit using this blog and just began using it again with Google's new SideWiki feature. Without further delay:

Since the original post, I have researched and found that Dan's information is and has been freely available through out the Internet. Simply Google the phrase "cascading debt". But unlike my original post, I will reveal here the concept, which I am still employing, and will be out of all debt, including a 90k mortgage, 75k student loans, and 10k remaining car loan, in 7 years.

Here's how it works:

First, as stated before, the "more debts the better" is true, but only if you are making even just a slight bit more on the minimum payments. Again, if you are barely scraping by, and some debts are going unpaid, this is still doable, but more difficult to get started. Therefore, I will write this with the assumption that you are making at least the minimum payments on your debts, and even better if you are paying $5 or more ABOVE the minimum on some or all of your debts. if you are only paying the minimum, you can still do this just as effectively if you can find $50 to $250 in your monthly budget somewhere else. Such as, canceling a NetFlix account, or ordering one less pizza per week.

Now, take an inventory of all those individual monthly payments, and put them in a column list. Now, next to each individual payment, write what the minimum payment is. Then in a third column beside that, write what the difference is between the two numbers, which will be what you are over paying on that debt. Like this:

Credit Card 1: $35 min pymnt. $40 monthly payment. $5 overage.
Credit card 2.: $22 min pymnt. $25 monthly payment. $2 overage.
Credit card 3: $53 min pymnt $60 monthly payment $7 overage.
Car loan : $210 min pymnt $240 monthly payment $30 overage.

Ad so on, listing all dents that gain interest, NOT fees you have to pay anyway each month (like condo fees, water bill, etc). Again, though, it you are only playing minimums, you can still try and find $50-$200 extra in your monthly outgo that you can apply to this system.
So then you add up all the "over payments" and write that number down. That is your "seed" money that will be all you need to get out of debt.

Now, you stop paying what you have been paying, and just pay the minimum on all the debts. Then you pick one debt, perhaps the lowest balance debt just so you can see it disappear so fast. You could choose the highest Interest debt, but honestly, if this system is employed, you will wipe that debt out so fast later on, the Interest you pay above smaller debts will be minimal...therefore, the smaller debts first approach may serve you better psychologically.

Then you apply your 'seed' money to the minimum payment of your chosen debt to pay off first. So let's say you have $40 in 'seed' money, and apply it to the minimum payment of $20 on your chosen debt.

You are now making a $60 payment on the debt. Let's assume it was a low debt of $180. Before, you'd to have paid it off in roughly 14 to 18 months after interest fees are calculated. But now you'll pay almost all of it 3 months, with a 4th month payment of just a few dollars, and you have changed nothing about your life style. You can still continue to eat out, go on trips, order pizza, if you had before. But it gets better.

After that 3rd or 4th month, you then take the seed money of $60, plus the min. pymt of your first card of $20, and now your new seed money is $80.

Now put that $80 toward your next lowest debt, say, a $1200 debt with a min. pymt of $35, and now you are paying $115 and paying it off in about 10-11 months as opposed to the 48 to 60 months it would have taken. Again, you still get to play if you prefer, and are not paying out any more than you did before.

This goes on to each debt. In my case, by the time I get to my car payment, I will be adding $170 to my already minimum payment of $260, which makes a $430/month payment. Wow! And again, I still haven’t changed anything about the way I play with my extra $200-400 per month. When I get to my mortgage, I will be paying $2200 per month on a $510 condo payment (my condo payment is actually higher, but the portion that is actually the interest bearing debt is $510). I will then pay off my 30 year mortgage within the next 4 years.

All of this is assuming I do not get any raises, and do not put any more money toward my seed money.

However, I will tell you that my seed money starting out was $230, and when I played with the numbers, increasing it by $10 or $20 made little difference in the final payoff date.
So, that’s the process. Again, the discipline is in not spending the extra money you find yourself having when you pay off each debt one by one. You simply roll-over the minimum payment you were paying on it to the next debt, plus your seed money. But imagine yourself debt free in 8 years. Is the discipline really that hard? Not for me.


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