Money Professor

Option two for debt reduction involves the application of a simple, yet tried and true, principle with many names. Get Out of Debt and become financially free! It has been called a a roll-up, a roll-down, a snowball and many other names. This principle essentially requires that you change some of your current spending habits without spending any more on debt than you do at this time.

This powerful principle is best illustrated through an example. Let?s say that this table is a person?s debts
DEBT Balance Interest Rate Monthly Paymt.
Car Loan 1 13,560 7% $340
Car Loan 2 9,400 9% $200
Discover Card 3,100 16% $80
Mastercard 850 18% $50
Student Loan 23,900 1.50% $150
Mortgage 1 189,000 6.25% $1,200
Mortgage 2 49,000 7% $800
Total Monthly Payment $2820

The problem is if you continue following your lender’s plan for paying off your debt, you will be making minimum payments which will accrue interest continuously. You may feel hopeless because you feel like you are spinning your wheels and not progressing to pay-off your debt.

So let?s begin with the current monthly payment toward debt: $2820. Remember that lenders want to keep your balances up for as long as possible, because that?s how they keep earning money. You want to Rapidly pay-off your balances as fast as you can. Your best bet is to restructure your payments so you get rid of balances quicker, and you can do this without paying anything extra toward debt.

What would happen if you instead of paying $100 extra/month toward your student loan, you paid the minimum of $50 and took that extra $100 and applied it toward your Mastercard? In six months you would pay-off your Mastercard. Then you commit to not never carrying any balances on that card ever again. Dave Ramsey would tell you to cut up your credit card and commit to only use cash[spin], we tell you to hold onto it so you can use it more wisely down the road.

With your Mastercard paid off, now you have $150 that you can apply to another debt. Apply the $150 to your next credit card. Adding $150 to your Discover Card payment is going to pay that balance off several months early, thus freeing up another $80 dollars to apply toward another debt.

[spin]How would you feel now with zero balances on your credit cards? You have $100 from the student loan, $50 from the Mastercard, and $80 from the Discover Card that you can use to pay down your next debt…like your first car loan. So now instead of paying $340 on your car loan each month, you are paying $570!

Using this debt reduction method will rapidly reduce your balance and as your balance shrinks the interest will not accure as fast. This is what is commonly known as a debt snowball, a debt roll-up or debt roll-down. Obviously, you still have to pay off your debts, and what is equally obvious is that you will still be in debt for several years. However, consider what would happen if, in 4 years, you paid off every debt except your two mortgages.

You will have freed up an extra $820 that you can pay directly toward mortgage principal every month. Now you?ve accelerated your mortgage pay-off to incredible speeds! In fact, you will be paying an extra $9840 towards your mortgage principal every year! With the principal shrinking so fast, interest will accrue slower and you will be saving even more money. In about nine more years you will be out of debt because you have applied the debt snowball strategy to pay-off your debt. That?s right, you will you will be completely out of debt, including your home in 13 years!

Getting Out of Debt helps us become financially free!

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