Weekly Success Tip

Debt Free in 5 years or Less

In a previous Success Tip, I’ve suggested that when it comes to money, people fall into three categories.

1.    People that spend more than they earn
2.    People that spend all that they earn
3.    People that spend less than they earn

In my experience 90% or more of the population falls into category 1 and 2. In fact, I’ve seen numerous annual surveys and research, stating that the average Australian spends 110% or more of their income each year! Amazing I know, and scary.

The question these people need to ask themselves is this; "Would giving more money to people that are in the habit of spending more than they earn (or all that they earn), really help them move towards financial success?"

Of course the answer is "no". Their habits would see to it that they spend it all again.

Still, most people are under the illusion that if they could just earn (or win) some more money, it would fix their problems. Yet what they really need is to permanently change their habits. The challenge is that most people don’t know where to start.

What follows is your door to financial freedom. If you are drowning in debt or just treading water, here is your chance to transform your financial situation, your life and the lives of all those that come after you.

The Strategy

1.    Sit down and take stock. Make a complete list of every single debt that you have. We are talking about consumer debt, not daily or weekly expenses (like fuel or train tickets). We're talking about things like car loans, personal loans, furniture loans etc.

2.    Next, write down your monthly repayment for each item listed.

3.    Now divide the debt amount by the monthly repayment amount to arrive at a ratio. (Interest rate and time are irrelevant to this ratio. We’re keeping it simple). Check out the examples below...

Loan              Amount     Monthly    Ratio
House              $200,000    $2,000      100
Car                   $29,000      $636         46
Visa Card         $7,800        $200         39
Mastercard       $4,500        $110         41
Furniture Loan $12,500      $600         21
Personal Loan  $14,000      $400        35

4.    Next we need to look at your income. This example is for illustration purposes only and we’ll imagine a young married couple, with two incomes and no children.

Monthly Income #1                      $4,100 after tax
Monthly Income #2                      $2,500 after tax
Total Monthly Income                  $6,600
Total Monthly Repayments          $3,946
Total less monthly repayments = $2,654

Less an extra 10% of monthly income: $660

Which leaves = $1,994 to live on

5.    Then identify the debt with the lowest ratio, for us it’s the Furniture Loan. Now take the additional $660 you’ve set aside from your monthly income and add it to your monthly furniture loan repayments. (This is the 10% extra you’ve set aside from your net income after allowing your monthly payments).

Notice your monthly debt repayments now increase from $3,946 (+$660) to $4,606.

6.    Concentrate this extra $660 on your furniture loan until it is paid off. When it is, you then apply this amount to the next lowest ratio loan.

In our case the Personal Loan, with a score of 35. Now you’ll be able to increase the repayments on the personal loan from $400 to $1,660. Make sense? That’s the original $400, plus the extra $660, plus also the previous $600 you were paying off the furniture loan each month.

Now that the furniture loan is settled, you have that extra amount to use on other loans, which is where the power and excitement of this strategy really kicks in.

7.    Proceed in the above manner until all debts are paid off. If you were to proceed in the above manner, you will be absolutely astounded how quickly you will be debt free.

Note: Don’t make the mistake of attacking the largest loan first, which is what most people assume. They are wrong. Approaching the debts in the manner prescribed above is the fastest proven way to eliminate your debts. For most people it will happen in under 5 years, even for those in dire positions.

It goes without saying that you’ll need to not incur any further debts while you go through this process. In fact, it’s probably best you cut up your credit card and avoid non-essential spending until your loans are paid off. Also, I'd recommend you delay all future purchases or upgrades in home or car.

The most common objection to this process is that people say they can’t afford to find the extra 10% we’ve set aside from our monthly incomes. I assure you, you can and you will, if you are serious. Often this can be done without affecting your lifestyle at all, just by being smarter and thinking about every dollar you spend.

And just think... when it’s done you’ll be in a very strong position, not just because you have a significant cash stream to direct towards investments, but because you’ll have changed your habits forever.

ACTION STEP:

If you have personal debts, implement and follow this strategy step-by-step. Set-up your debt elimination plan and relax, knowing your life is under control, because you are. Then prepare yourself for the jump to light-speed next week!