What’s the quickest way to get free from debt, how can I pay massive amount of money and still be able to eat and pay rent?


1 answer

  1. #1

    Great question and theres a very simple principle that provides the guide to becoming debt free.
    I will make some basic assumptions here to help with the explanation.
    Assume the following standard type debts.
    Store cards
    Credit cards
    Pay day loans
    Pawn shop loans
    Unpaid fines
    Pawned items
    Personal loans
    Car loans
    Housing loans / mortgages.
    Investment loans
    Others… strange deals you’ve done on the side

    Now each of these are costing you interest and penalties. Make a list of all your debts, to whom, the principle amount, interest charged and if in default and therefore costing you penalty fees and higher intetest charges.
    Your list should look something like this….
    Unpaid fines… $200, in default.
    Store Card: $1,124.00, 28% interest.
    Visa: $5,799, 18%
    Car loan: 15,000 16%
    Housing loan: $250,000, 5%

    Your list will be different as it will be yours, make it true and as accurate as possible.

    Now your income. This is the easy part, we all know how much we earn or get paid, we just dont know where it goes!!
    Salary: $4,500 / month.

    Assuming you are paying the minimum payments on all your debts, living and have small dispisable income of say $100 / week.

    What we are going to do is use the power of compound interest to wipe out your debts.

    Our job now is to pay off the debts one by one, starting with the most costly, pay that off then move to the next one. But move to the next one with the payment that was associated with the previous.
    In this example the unpaid fines will become the biggest expense.
    So…. Lets start.
    Unpaid fines of $200. Using our small spare cash of $100/week we pay off the unpaid fines. This does not give us extra money, however it saves us considerable future expense as unpaid fines can double in value very quickly.
    Next costly loan…
    Store card… $1,124.00
    You are probably paying $50/month as a minimum payment. Now we are going to continue paying that $50/month and add our $100/week spare cash to our payment and NOT use the card ever again!
    There are 4.33 weeks in one month so our $100/week is $433/month +$50 minimun payment. So our next payment on our store card will be $483 being the $50 plus our $433.
    After 2.3 months, lets say 10 weeks our store card is fully paid. No more 28% interest. Cut the card, close the account and buy yourself a treat :).

    Remember now we have spare cash of $483 per month. This we are going to add to the minimum payment of our next interest bearing debt.
    The VISA card at 18%
    Balance of $5,799. The minimum payment on this would be around $90 /month. So now we will add our spare cash to our minimum payment to come to our new payment.
    $483 + $90 = $573 being our new monthly payment on our visa card. DO NOT USE YOUR VISA CARD FROM THIS POINT ON! Think debit cards!
    In 11 months we have paid off our Visa card and now have spare cash of $573/month.
    Now we attack our car loan of $15,000.
    Our minimum car loan payment would be around the $500/month, now we will add our spare cash to this payment. Being $500 + $573 = $1,073 we will now pay each month.
    In 14 months our car is paid off leaving us with $1,073 spare cash each month.

    Now we are debt free except for our house loan with spare cash of $1,073 each month.

    The housing loan is cheap intetest. So now you have a choice, is there an investment that can produce a higher interest than your housing loan costs. If so put your $1,073 each month into that investment. If not pay off your house faster by using that spare cash to pay off the loan.

    Now a note about this. Some people will tell you to get a “debt consolidation” loan and roll all your debts into your housing loan because its lower interest. Dont do it! Cos it extends your debt for a much longer time and the temptation if futher debt is too high. It will keep you poor for your entire life!

    Hope this helps.


    O T



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