Sunday, 12 June 2016

$5 Debt Elimination Method



Cooking from scratch needs celebrating with enthusiasm


WELL it’s all very nice for me to post about what it would be like to be living without debt here, but what about some practical tips on how that can actually work?

Here is my favourite way to tackle debt – it sure works great for me.


  THE $5 DEBT ELIMINATION METHOD

All you need to do is find $5 per week.  Maybe that is making a huge (!) sacrifice of 1 less large coffee per week, or maybe a couple less cans of soda weekly, or even maybe not buying your lunch for just one day a week….whichever way you choose you will need to come up with an extra $5 a week to use as leverage towards your debt elimination.


A hot pot of curried pumpkin soup - can you smell it?


OK, here’s how:

1.       Make a list of your debts – be honest.  Make sure you list every one of them.
2.       Make a total list of each debt amount owing.
3.       Organise from smallest to largest debt
4.       Next list the minimum payment for each noting if it is weekly, fortnightly or monthly.
5.       Then make note of your pay day and its frequency- weekly, fortnightly or monthly.
6.       Make a Table of all these facts

Here is an example of  what your basic work table should look like

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00
$50.00


$100.00
Myer Card
$500.00


$15.00
$7.50
Credit Card 1
$2,500.00


$50.00
$25.00
Credit Card 2
$5,700.00


$114.00
$62.00
Car Loan
$12,400.00

$96.00

$96.00
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,140.50

Next add $5 per week to the SMALLEST debt’s minimum payment, like so….

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00
$55.00


$110.00
Myer Card
$500.00


$15.00
$7.50
Credit Card 1
$2,500.00


$50.00
$25.00
Credit Card 2
$5,700.00


$114.00
$62.00
Car Loan
$12,400.00

$96.00

$96.00
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,150.50

When that debt is paid add $5 PLUS the minimum payment of the debt you have just paid off to the next debt.  Like so…

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00


$15.00
$117.50
Credit Card 1
$2,500.00


$50.00
$25.00
Credit Card 2
$5,700.00


$114.00
$62.00
Car Loan
$12,400.00

$96.00

$96.00
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,150.50

Repeat the same concept on the next debt by adding the $5, minimum payment 1 and 2 to this minimum payment too – repeat this with all your repayments one by one like so...

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00


$50.00
$142.50
Credit Card 2
$5,700.00


$114.00
$62.00
Car Loan
$12,400.00

$96.00

$96.00
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,150.50

Then...

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00



PAID
Credit Card 2
$5,700.00


$114.00
$204.50
Car Loan
$12,400.00

$96.00

$96.00
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,150.50

Then....

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00



PAID
Credit Card 2
$5,700.00



PAID
Car Loan
$12,400.00

$96.00

$300.50
Mortgage
$300,000.00


$1,700.00
$850.00
Total Debt
$321,300.00



$1,150.50

Then....

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00



PAID
Credit Card 2
$5,700.00



PAID
Car Loan
$12,400.00



PAID
Mortgage
$300,000.00


$1,700.00
$1,150.50
Total Debt
$321,300.00



$1,150.50

Then finally.....

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00



PAID
Credit Card 2
$5,700.00



PAID
Car Loan
$12,400.00



PAID
Mortgage
$300,000.00



PAID
Total Debt
$321,300.00



PAID


The last step is the MOST important – after your debt is paid, continue to pay the exact same final fortnightly payment amount into an online savings account for just 1 year.  Here is the result….Not only are you debt free, but you now have a nice nest egg happening. See!?

Debt Name
Debt Amount
Weekly
Fortnightly
Monthly
My Paycycle
Fortnightly
Owe Mum
$200.00



PAID
Myer Card
$500.00



PAID
Credit Card 1
$2,500.00



PAID
Credit Card 2
$5,700.00



PAID
Car Loan
$12,400.00



PAID
Mortgage
$300,000.00



PAID
Total Debt
$321,300.00



PAID
ANNUAL SAVING
$29,913.00



$1,150.50


THE BENEFITS OF THIS METHOD

1.       It attacks your debt at an emotionally encouraging level and exponentially raises your likelihood of success.
2.       It stops you spending each paid-off debt’s minimum payment and applies it to the next debt
3.       You only ever pay your minimum payments plus $5  through the whole process
4.       It sets up a clear repetitive plan for your entire debt life
5.       It reduces the overall payment time on your debt enormously


Chilli and cheese scones to go with the soup



Mathematically, this is not the most accurate way to attack debt as pure math would dictate that we attack the highest interest rate debt first, however, we rarely go into debt for mathematical reasons….we usually go into debt for emotional reasons, thus we need to fight back with a counter emotional plan to succeed otherwise we will go straight back into debt.


Spend an extra five minutes
making meal time special
yes, even with soup and scones.


Really hope this have given everyone some courage to start TODAY.

Take care folks - stay nice

Mr HM

9 comments:

  1. This is a method that many people have stated worked well for them.

    ReplyDelete
    Replies
    1. Sherri, I first read about this method in the mid 1980s. Since then it has been renamed by some as the snowball method and Dave Ramsey has taken the basic elements and built a empire out of it. I think it is important that we spread this info for free - paying it forward. The last point of the paln for me is the most powerful as it ensures that we produce something not just eliminate debt.

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  2. Very fortunately our only debt is our mortgage, but it's a pretty big one! We have paid 60K off it in 8 years, which is great, but I'm about to embark on an ambitious goal, to be mortgage free by 50! Which is only 6 years away. I've got a few ideas on the how, but I look forward to more posts along these lines!

    ReplyDelete
    Replies
    1. Mortgage free by 50 sounds a great plan Cheryl.

      Delete
  3. I also used the Snowball Method as in the early days of actually facing our debt, we had lots of little debts in the form of store cards and it was a huge boost to pay them off in quick succession. As you say, mathematically speaking, the debt avalanche method of tackling highest interest first would have got us out of debt sooner, however it takes a clinical approach and an iron will - as you say, those in debt often are there because they have spent emotionally and therefore the snowball method works better.
    And starting with just $5 extra a week is small and manageable.
    Thanks for the great demonstration. I hope it helps others the way it helped me :)

    ReplyDelete
    Replies
    1. You have done fantastic jay (folks, check out jay's diary blog of her debt reduction)

      Delete
    2. Thanks for the promo :)

      Delete
  4. Like Cheryl, our only debt is our mortgage which is now down to about $200K. We managed the repayments for this easily when on two incomes and are travelling along okay now that we only have the one income and a little bit of extra money from some sporadic relief teaching. I've become more and more aware of the chains of debt as I've grown older. We've never added to our mortgage debt with personal loans and our credit card is paid off in full each and every month. With only one loan to concentrate on, it's a lot easier to manage.

    ReplyDelete
    Replies
    1. Sounds like you are on the home-run Meg

      Delete

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