In Part One of this series, I explained how I feel we can build our faith and better attune our lives to God's will through the proper use of money. In Part Two, I covered the mechanics of preparing and living on a budget and how this assists us in living in accordance with God's will for us.
How to Retire Debt Quickly
Step 1 Stop borrowing money to live beyond your means.
Step 2 Employ a rapid debt repayment strategy.
Debt Repayment
Significant consumer debt should be paid off as quickly as possible. If you are in "consumer/credit card debt" when you implement the lifestyle described in Parts 1 and 2 of this series, and you do not have the monthly cash inflows to pay off debt quickly, utilize up to 95% of the "10% rainy day" savings amount for debt repayment. So, instead of saving, pay down debt. When debt is paid off, be sure to reallocate the debt repayments to savings.
Assume your monthly income is $2500. Your savings at 10% is $250. You need the money to pay down debt so you can be free of consumer debt. Thus, in this example I would suggest putting $12 in savings instead of $250 and adding the $238 ($250 x 95%) to your debt retirement payment. The reason for not putting the full $250 to debt repayment is to help you develop the habit of making monthly deposits into long term savings.
Often, people have numerous consumer credit accounts and it is difficult to make significant reductions. Here's how you pay off consumer debt:
1) Figure out how much monthly cash flow you can use to pay off old debt.
2) Make minimum payments on all but the smallest balance.
3) Make the largest payment possible on the smallest debt using all available debt reduction resources. When your available cash flow increases, allocate a significant amount of the increase to consumer debt retirement.
4) When the smallest debt is paid in full, add the amount you were paying on the smallest debt to the minimum payment you have been paying on the second smallest debt. When that debt is paid off, take the entire amount and add it to the minimum payment you have been paying on the next smallest debt… and so on until all consumer debt is extinguished. Each time a debt is paid off, the monthly payment on the next smallest debt increases by the entire payment previously made on the smallest debt.
This approach results in rapid debt reduction and reinforces the habit because you see old account balances disappear one by one. Once the old debt is paid off, add the amount you used to pay to the amount you have been putting in savings every month so it gets back to 10% of your gross income.
Consider the following example:
|
Credit Card No. 1 |
$1,800 |
21% interest |
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|
Credit Card No. 2 |
$8,000 |
19% interest |
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|
5 year Auto Loan |
$9,500 |
15% interest |
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|
Student loan due in 8.5 more years |
$28,000 |
6% interest |
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|
Card No. 1 |
Card No. 2 |
Auto Loan |
Student Loan |
||
|
Total Debt Amount: |
$47,300 |
$1,800 |
$8,000 |
$9,500 |
$28,000 |
|
Minimum Payments |
$640 |
$20 |
$70 |
$200 |
$350 |
|
Additional resources available to pay down debt: |
$238 |
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|
Total debt payments: |
$878 |
||||
|
Rapid pay-down plan: |
$878 |
$258 |
$70 |
$200 |
$350 |
|
Estimated months to payoff: |
8 |
||||
|
Month 9: |
$878 |
$0 |
$328 |
$200 |
$350 |
|
Estimated months to payoff: |
33 |
||||
|
Month 41: |
$878 |
$0 |
$0 |
$528 |
$350 |
|
Estimated months to payoff: |
11 |
||||
|
Month 52: |
$878 |
$0 |
$0 |
$0 |
$878 |
|
Estimated months to payoff: |
19 |
||||
|
Total estimated months to payoff all debt: ($47,300 plus interest): |
71 |
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|
Month 72: |
Add to monthly savings: |
$238 |
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|
Revise budget to best utilize an additional $640 available now that consumer debt is paid off! |
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A Great Gift for Your Children
This system really works. Share it with your children early; later in life they will be disciplined at budgeting and living within their means. You will have done them a great service!
When our kids were in elementary school, we figured out what we spent on them annually for clothes, school, recreation, etc. We stopped buying stuff for them and significantly increased their "allowances." This bestowal of a great responsibility at a young age did not hurt them one bit; as a matter of fact, it really helped them. We taught them how to tithe, save and budget using cash and the envelope system. It was hard to watch my 11 year old son go to school for two months with duct tape on his shoes because he spent his shoe money on a Game Boy. For him, it was worth the sacrifice. We had to honor his decision and reinforce the responsibility we had given him to budget for his needs.
One of the greatest lessons the kids learned is that they can wait for things they want or need. They learned to ask God for things they needed and wanted and, sometimes, incredible things happened. Children are much more trusting than adults. Take advantage of this and help them learn to trust God for their needs. That means you do not have to meet all their needs! When a child learns to trust God and expects Him to take care of him/her it is a great gift! I thank God for sending the great teachers of these things into our lives when we were young parents! Knowing where my wife and I were mentally at the time, the mere fact that we could listen and believe was a major case of divine intervention! The mechanical part of this system really works…..but the habit of waiting on the Lord is a great faith builder because God always responds to prayer. Now that my kids are grown, I hear things like this when an old car is nearing the end of its life: "Dad, I can't wait to see what God's going do with this!"
I found that in raising kids that it's important to follow through and really do your best to affirm them when they succeed…and look hard for those successes. If you help your kids develop a budget, meet with them every month and let them show you how they did. Let them know that they are probably one of the only kids around that is wise enough to keep track of their spending. Even if your circumstances prevent you from tithing and saving to the extent you would like, teach your children how to do this correctly. Great habits formed in childhood pay off for a lifetime! The most important aspect of course is to teach them to trust God to meet their needs.
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