Santiago shop-a-lot wants to eliminate the following debts:
Interest Rate ~ Regular Payment ~ Balance Owed ~ Name
18% ~ $150 ~ $7,000 ~ Debt #1
11% ~ $90 ~ $3,000 ~ Debt #2
6% ~ $270 ~ $12,000 ~ Debt #3
Total debt equals $22,000 (7,000+3,000+12,000)
5% of $22,000 is $1,100 (22,000 multiplied by .05).
Santiago’s bills are due monthly, and he makes $4,000 a month. He’s made some sacrifices and set his debt elimination percentage to 20%. That generates $800 per month.
$800 is just over three and a half percent of his total debt of $22,000, which isn’t ideal but still effective. If you can swing it, you want your debt elimination percentage to generate an amount equal to 5% of the total debt you seek to eliminate each month. In Santiago’s case that would be $1,100.
The best debt elimination plan calls for debt #1 to be dealt with first. Add the money generated by the debt elimination percentage to the regular payment for debt #1.
Debt #1: A $950 payment (the $150 regular payment plus the $800 generated by Santiago’s debt elimination percentage) is made to Creditor #1. A regular payment of $90 and $270 continue to be made to creditors #2 and #3 respectively. Do this every month until debt #1 is extinguished. Now turn your attention to debt #2.
Debt #2: A $1,040 payment (regular payments of $150 and $90 for debts 1 and 2, plus the $800 generated by the debt elimination percentage) is made to creditor #2. The regular monthly payment of $270 is made to creditor #3. Continue until debt #2 is history.
Notice the regular payment for debt #1 is included with the payment to creditor #2, even though debt #1 is paid off? That really ups your payment to creditor #2. That’s the start of your debt tsunami, snowball, pyramid, avalanche, or whatever other colorful metaphor you want to call it. Now on to debt #3.
Debt #3: A $1,310 payment (regular payments of $150, $90, and $270 for debts 1-3, plus the $800 generated by the debt elimination percentage) is made to creditor #3. Make this monthly payment to Creditor #3 until Debt #3 is gone and you’re out of debt.
What about your own debt elimination list? Have you written it yet? If not, it’s time to get to it!