Eliminates Your Debts! Wajib!

DEBT REDUCTION PROGRAM: taken from http://www.financiallyfree.com.au/debt_control.htm

This is the fun part because if you can stick to your budget and maintain your target “Disposable Income” figure, you can literally calculate how long it will take you to pay off debt and be debt free. Then it’s just a matter of crossing off the months in countdown mode!!

1. Create a Debt List:

First, make a “Debt List” of all your debts. Put them in order so that those with the highest interest rate are at the top of the list. List the minimum monthly payment that you must make against each.

Note: The annual interest rate and minimum monthly payment amount are usually listed on your monthly statements.

Heath and Melissa’s debt list looks like this:

Debt	Interest Rate	Amount Owing	Min. Monthly Payment
Coles-Myer Card	22%	$1756	$38
ANZ Visa Card	18%	$3300	$68
Car Loan	10.5%	$7000	$151
Home Loan	6.5%	$110,000	$744
Total Debt:		$123,580	$1001

1. Eliminate Debt Target No. 1 – $1780 Coles Myer Card:

Your target will always be to eliminate the debt at the top of your list – the one with the highest interest rate. Therefore, you need only make the minimum payments on the other debts until the one at the top of the list is eliminated.

Heath and Melissa have an extra $200 p/mth to throw against target debt no. 1 in addition to the $38 already budgeted for.

Let’s see how long it will take them:

Coles-Myer Card

Month	Start Balance	22% Interest Added	Accumulated Balance	Repayment	End Mth Balance
July 2003	$1,756	$32.19	$1,788.19	$238	$1,550.19
Aug. 2003	$1,550.19	$28.42	$1,578.61	$238	$1,340.61
Sept. 2003	$1,340.61	$24.58	$1,365.19	$238	$1,127.19
Oct. 2003	$1,127.19	$20.67	$1,147.86	$238	$909.86
Nov. 2003	$909.86	$16.68	$926.54	$238	$688.54
Dec. 2003	$688.54	$12.62	$701.16	$238	$463.16
Jan. 2004	$463.16	$8.49	$471.65	$238	$233.65
Feb. 2004	$233.65	$4.28	$237.94	$238	-$0.06

Presto. In 8 short months they’ll be able to cross item 1 off the debt list – permanently if they cut up the card and never use it again!! (highly recommended).

1. Eliminate Debt Target No. 2 – $3300 ANZ Visa Card:

Having killed debt target no. 1, Heath and Melissa now have an extra $238 p/mth to throw against the next debt on their list in addition to the $68 already budgeted for it.

Therefore, they’ll be able to pay it off at the rate of $306 p/mth. Without drawing the table, at this rate they would pay off their ANZ Visa card within less than 12mths even though its balance was nearly twice that of their Coles-Myer card.

As you can see, your ability to kill the remaining items on your Debt List improves significantly as each item from the list is scratched as you are able to roll-over those repayment amounts against the new target.

Let’s move on…

1. Eliminate Debt Target No. 3 – $7000 Car Loan:

With the first two debts paid off, Heath and Melissa have an extra $306 to allocate against the car loan in addition to the $151 already budgeted for. They are therefore able to throw $457 at the car loan.

At this rate, the loan will be paid off in under 17mths (less than 1½ years).

1. Eliminate Debt Target No. 4 – $110,000 Home Loan:

Now their $110,000 home loan was originally designed to be paid off over 25 yrs. With the budgeted repayments of $744 p/mth, this is how long it would take them.

But now, with all other debts eliminated, they have a spare $457 to throw against the home loan in addition to the $744 already budgeted for. They’ll therefore be able to pay their home loan down at the rate of $1201 per month.

At this rate, their loan will be paid off in just over 10 yrs.

This period could be shortened even further if they were to apply some of the techniques discussed in our Mortgage Reduction Strategies article.

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