Accelerated Debt Repayment
In order to be successful in implementing a debt elimination plan, you need to be determined and you need to follow a structured strategy. Most people just try to throw money at their indebtedness without having a real plan based on sound reasoning. You need to implement YOUR repayment plan following certain steps that will almost always work. You must be organized, you must be persistent, you must be consistent and you can’t let anything hinder you from obtaining your ultimate objective. If you’re fed up with indebtedness, if you’re tired of always being restricted from what you want to do financially, then you should be ready to go forward aggressively with this program.
This first repayment option is called the Accelerated Debt Repayment Strategy, or simply ADR. It’s most useful and appropriate for families who’ve not yet defaulted on any of their monthly obligations. It’s a structured, self-directed program that when carefully followed according to the instructions in this article, will repay ALL your indebtedness in the shortest possible time. At the same time it will protect and even improve your credit rating. Other articles available on this website look at other debt repayment options that involve special programs that are best for people who’re already having difficulty making their monthly payments on time.
Just so you know, most people who’re trying to pay off their bills divide the amount of extra money they have among ALL their creditors and then they send those amounts in addition to their MINIMUM payments to ALL their creditors each month. But that’s NOT the most efficient way to get out of debt. There’s a better way and you implement this strategy by observing the following Steps:
If you haven’t done so already, make an IRREVERSABLE decision for your family that you’re going to make a change in the way you handle your finances and that you’re going to follow your debt repayment plan no matter what happens until you get out of debt. You must first decide to DO something and then take the related action before you can ever accomplish anything! The main reason most people never get out of debt is because they never take the first step. And, the decision to do it needs to be irreversible in the sense that you’ve made the decision not ever to go back to where you’ve been. No going back! The decision has been made and you and your family are committed.
Conduct a family meeting and get everyone on the same page. All the members of your family need to be in agreement with what you’ve decided to do and what your ultimate objective is. Make debt repayment a top priority for your WHOLE family. You need everyone involved, everyone committed to supporting your debt repayment plan. The entire family will have to make sacrifices until your objectives have been achieved and you need to ALL be in agreement when questions arise.
A good idea is to set up a procedure for resolving expenditure questions as they arise. From the beginning of the plan’s implementation, everybody should be in agreement on the procedure and how it will be used when these questions arise. Suppose one family member wants to spend money on something and the alternative is to apply that extra cash to your debt repayment plan. How will you resolve it without straining relationships? How will you be consistent when these questions keep coming up over the life of your program? You need a resolution procedure and you should agree from the beginning on how you’ll use it.
Also, it’s really constructive to have your children involved in the program too, even small children so that everybody is on board and enthusiastically supportive of the family project. Getting together regularly for family meetings to discuss progress and future plans is a wonderful way to maintain the family’s level of interest and enthusiasm as the weeks and months and years go by. EVERYONE has to stay determined to never quit and never go back.
The next step is to take the time to prepare a Family Budget. A simple form has been provided for your use at the end of this Chapter. Did you know that more than 85% of all American families have NEVER had a Family Budget? As the money comes, it’s spent according to a loose priority list that leaves open how the family’s optional and miscellaneous expenses are going to be paid for. This is why most families run out of cash around the 21st of the month and have to put the rest of the month’s expenses on credit cards. They have no idea or plan for how they’re going to spend their money and so they just spend it until it runs out.
In order for this program to work, you’ll need to have some form of Family Budget because part of the plan is to identify the amount of SURPLUS cash you’re going to have available at the end of the month to apply to your debt repayment in the manner revealed in this publication. If you find yourself needing help in putting your Family Budget together, we recommend that you purchase one of our publications, which provides a lot of detailed information about budgeting.
Go to this LINK to review this publication: Budget Yourself to Financial Victory
From the outset of your program, it’s essential that you STOP using credit cards and STOP acquiring new debt. Cut those credit cards up if you have to and throw away the pieces! If you run short of cash during the month, do your best to find it in some other place in your Family Budget instead of using credit. If you don’t stop acquiring new indebtedness, then you’ll just be replacing the old debts with new ones. And you’ll have less cash available to pay down your already existing debts because you’ll be making new minimum payments on the new debt you’ve been acquiring. THIS PROGRAM CANNOT SUCCEED IF YOU DON’T STOP ACQUIRING NEW DEBT. Please don’t fail to take this essential step.
As soon as possible put together a contingency fund of at least $2,000.00 before you start trying to get into your debt repayment program. If you get started in the repayment program too soon and an unexpected emergency strikes, it will be really discouraging to have to go back and take some of your old debt back to cover the cost of the problem. Having a contingency fund of this size can help you avoid that kind of dilemma. You will want to have those funds set aside in some kind of bank account you can’t access too easily and it should be a real emergency that causes you to go into your contingency.
Ultimately you’ll want to be saving for a much larger contingency fund as you’re able. You’ll want it to eventually reach an amount equivalent to at least six months gross income. After that you should be working to put together a fully funded contingency fund of at least $100,000.00. That’s one hundred thousand dollars! If you don’t have debt payments every month, you’ll be surprised at how fast you can accumulate such a meaningful savings. Once you have it you’ll probably never miss sleep again.
Next you’ll want to gather all your bills together. Find the most recent statement for each creditor that you won’t be able to fully pay off at the end of the current month. Then arrange those statements starting with the lowest balance on top and going through all your creditors in the order of ascending outstanding balance until you reach the creditor with the highest outstanding balance at the end. For most families the creditor with the highest outstanding balance will be for their home mortgage. To clarify: arrange all your debts from lowest outstanding balance at the top of the list to highest outstanding balance at the bottom.
Now summarize your creditor information on a piece of paper starting with the list of your creditors from lowest outstanding balance to highest. Indicate the creditor name, the current outstanding balance and the related monthly minimum payment. There is a table at the end of this chapter showing a typical scenario. This list will be the launch pad for your ADR Strategy.
Before you start the plan, pull your credit reports from the three national credit bureaus: Equifax, Experian and Trans Union. According to federal law you‘re entitled to receive one free credit report from each of the credit bureaus each year. To obtain your free annual credit reports simply go to the following web site: www.annualcreditreport.com You can order all three credit bureaus from this single web site. It is the only authorized website in America for this purpose.
The reason for ordering your credit reports is to be sure that you are including all your creditors in your debt reduction program. Sometimes people forget about older debts and will neglect to include them in the program. But your credit reports are likely to include everything up to seven years from the date of your last payment activity.
Don’t forget to check the credit reports of both husband and wife because sometimes you can find a surprise where you didn’t expect it. By the way, did you know that it’s estimated that more than 70% of all credit reports contain errors? If your reports have any errors, you’ll want to begin a correction process because as you go through your debt reduction program, you’ll want to see improvement in your FICO Scores so you can obtain lower interest rates on your remaining debts thus shortening the term of your repayment program. If you need help correcting errors on your credit report, you can consider purchasing our publication on this subject:
Go to this LINK to review this publication: Credit Repair that Reduces Monthly Payments
Last, call each of your creditors and ask them to reduce your current interest rate to the lowest possible level. Many people who’ve made their payments on time and have generally a good payment history are paying interest rates higher than they have to because they haven’t paid attention. Many Creditors will work with you and reduce your interest rate on a provisional basis but you have to request a reduction. If you make your payments on time for the next several months, they’ll then consider even another reduction.
The point is, consumers have to be attentive and proactive about their credit matters. You don’t have to be afraid of your creditors. Tell them what you want and see what happens. The worst that could happen is that your creditor refuses to reduce your interest rate. But some of them WILL respond to your request and that could shorten your repayment program substantially because more of your monthly payments will be going to pay off principle. It’s definitely worth a try!
If you feel the least bit intimidated about contacting your creditors, Chapter Six in our publication DEBT SMASHDOWN provides a lot of detailed info about how to deal with them. Do NOT allow yourself to be intimidated with the idea of talking to creditors. Most of the people you’ll be talking to have less knowledge and responsibility than you do. Sometimes they talk tough but they’ve been trained to do that so they can get the upper hand. It never hurts to call and find out what they have to offer that could help you reach your objectives faster than would otherwise be possible.
USING THE LOW BALANCE ACCELERATOR STRATEGY
The key for getting out of debt in the shortest possible time is to put the maximum amount of surplus cash into the program. Therefore, when you prepare your Family Budget form, you’ll want to be tough and frugal in calculating the maximum amount of Surplus Cash you have left over after paying for all your living expenses. Look for money everywhere! You must be able to come up with a positive number for the Surplus Cash calculation in order to get out of debt with this program. Notice that there is NO place for credit card payments on the Family Budget form.
Next, take the list of creditors and outstanding balances that you prepared in Step Five and add up all the monthly minimum payments. Then subtract the total of the monthly payment minimums from the available Surplus Cash that you derived from the preparation of your Family Budget. The resulting number is called the Accelerator.
Next, review your list of outstanding balances which you previously arranged starting with the one with the lowest balance and proceeding through the list to the creditor with the highest outstanding balance at the bottom of the list. Please see the Typical Example shown at the end of this section to help guide you through this exercise.
Your first objective is to ATTACK the debt with the lowest balance and pay it off first as explained below and then afterwards descending down the list as you pay off each creditor with the lowest remaining balance.
As the final step, add the full Accelerator amount to the monthly minimum payment at the top of the priority list and do that every month until it’s paid off. The top of the priority list is the one with the LOWEST outstanding balance. All the other bills receive just their normal minimum monthly payments.
When the top priority bill is paid off, i.e. the one with the lowest balance, calculate a new Accelerator by adding the monthly minimum of the bill you’ve just paid off to the old Accelerator. Then move this as a new Accelerator down to the second bill on the priority list adding it to the normal minimum payment you’re already paying. Continue moving down the list in this manner applying an increasing Accelerator to each monthly minimum until the entire list of debts, INCLUDING YOUR MORTGAGE, has been totally paid off. If you ever receive extra money for something, always pay down the remaining creditor with the lowest balance.
Using this approach you won’t care which accounts have the highest interest rates because there’s no significant difference in the repayment time between this approach and one that features a prioritization by interest rates. When we run the two different approaches through the computer, they always come out about the same. The advantage of the recommended approach based on lowest outstanding balance is that you’ll begin to see progress earlier in the program which helps motivate most families to push through to victory. That’s the main reason we recommend it over the approach based on interest rates.
On the following chart you’ll find an example of a simple accelerated repayment plan covering seven unsecured creditors. The secured debts (mortgage on the home and the car note) have been included at the end of the list. This is a fairly typical example both in the number of creditors and the amount that the family is in debt. Please be sure to study the comments that follow the numbers until you’re sure you understand how it works.
|Creditor||Balance||Min Mo Payment|
|Sub Total Unsecured||25,760||588|
- Surplus Cash from Budget = 650 (before payments to unsecured creditors)
- Accelerator = 650 – 588 = 62 per month
- Accelerator should be added to the minimum payment at the top of the Priority list only
- Payment to Discover = 21 + 62 = 83 per month
- All other payments remain the same (i.e. pay only the minimum monthly payments) until Discover is paid off
- Then payment to Sears = 50 + 83 = 133 per month until paid off
- Then payment to Citibank = 68 + 133 = 201 per month until paid off, etc.
Go to this link for a free budget form
DON’T FORGET TO CONSIDER BALANCE TRANSFERS
As you implement your ADR Strategy, don’t forget that because you’ve gone after your indebtedness before your credit rating was tarnished, you may be able to make balance transfers from one credit card to another. One advantage from this is that you may be able to arrange an extended period of time during which you won’t be charged interest. That’s right, zero interest for perhaps a year or even longer. There will be an upfront charge of say 3% of the amount you’re transferring which you should compare to how much interest you would be paying if you don’t make the transfer. If you’re not paying interest on a couple of the creditors at the top of the list, it will help you pay off your debts more quickly because more of your monthly payments will be going to repay principal.
Balance transfers can be a benefit but there are a couple of things to watch out for:
- You should limit the number of balance transfers to about two or three per year in order to avoid having a detrimental effect on your FICO Scores on your credit reports.
- You should always wind up on ALL your creditor relationships with outstanding balances that are less than 50% of their individual credit limits in order to maintain the highest possible FICO Scores. Keep in mind that the higher your FICO Scores, the lower the interest rates you can qualify for and the sooner you will be able to pay off all your debts.
Analyze the applicability of your debt portfolio to this idea but let’s just say you were able to use it to exchange the outstanding balances of the two creditors at the top of your list, i.e. the two creditors with the lowest balances. The result would be that you would be working on them during an extended period when NO additional interest would be charged. Just figure out what you want to do and call each of the creditors to find out if they would be interested in offering you a balance transfer opportunity.
CONSIDER WAYS TO INCREASE YOUR INCOME
While you’re involved in this program, you should consider how to increase your income even by a small amount and complete your program sooner. The idea is to seek additional income and apply ALL of it to the ADR Program. Resist the temptation to use it to increase your standard of living and apply it ALL to your ADR.
One idea to consider is finding a second, part time job even if the additional income is only a few hundred dollars per month. Even small amounts applied to the program over a period of time will add up and significantly reduce the original debt repayment term.
Another idea is to conduct Garage Sales of things in your home that you no longer have any use for. One person’s “trash” is another person’s treasure so look carefully around your home to find things that are no longer useful. Anything you find there without a use or a sentimental value may turn out to be a cash generator that will help you get out of debt.
A third idea is to start a home-based business especially if you are a full-time W-2 employee for some company. Why? If you start your own company, you’re entitled to more than one hundred possible tax deductions that the IRS would love for you to take advantage of. Our tax code is written largely to encourage the formation of small businesses. Go ahead and work for your W-2 employer while conducting your small business in your spare time so that you can take the tax deductions. The objective is to reduce your personal income tax which increases your disposable income. And you know where to put that additional income, right? We DO have another publication that can help you start a small business. Either contact our office or look for the below title.
Go to this LINK to review this publication: Start a Home Business in 30 Days
Go to this LINK to review this publication: Employee to Employer in 90 Days
PURSUING SUPERNATURAL PROVISION
One of the benefits of being a Christian believer is the availability of God’s Grace which is defined as His undeserved favor and empowerment. During whatever program you wind up in, you can be praying for miraculous provision by grace through faith. And along with your prayer you can begin to EXPECT what you’ve asked for to show up. God wants you to be out of debt more than you do and He has extra provision for you if you can connect to it by faith. He’s not usually just going to drop it in your lap. Rather, you will have to receive it by faith the same way you received salvation.
Supernatural provision is something to be actively pursued by Christian believers. The Bible says that believers have been redeemed from the curse and connected to the Blessing of Abraham. Biblically speaking, believers have been “rescued” from the curse of indebtedness and connected to the blessing of abundant provision. Believe for God’s provision with the expectation that He wants you to have what you’ve asked for.
You’re now ready to design your very own ADR program and get moving toward the elimination of your indebted-ness. So, take control of your finances and implement your repayment strategy ASAP. Start by making a list of all your creditors from lowest to highest balance. Be relentless and stay on top of your program. Go for it aggressively and you’ll be seeing substantial progress in no time!