Unusual Ways To Make Money

Your Personal Debt Reduction Plan

Unusual Ways Newsletter
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You probably already know some of the things you need to do for your own debt reduction plan. But you will find a few new ideas here. You'll also find some inspiration in the following story.

Amy's Simple Debt Reduction Plan

Amy was tired of the stress of trying to keep track of her credit card and other debt. She was worried about what would happen if she ever got ill or lost her job. She didn't like the feeling of being trapped and of working to pay so much in interest charges alone.

She had bought a house a few years back, which was a good move, she knew. But then as soon as it was worth a little more, she had refinanced it to take out some of the equity. It seemed like a good idea at the time, and her friends and banker encouraged her to do it. Most of the $10,000 she took out was used to pay off high-interest credit cards, after all. Pay 8% instead of 16%? That made sense, didn't it?

She discovered too late that this common "wisdom" was often wrong. She would be paying on that debt for 30 years instead of 4 or 5, meaning that she would pay much more in interest, even at the lower rate. Also, it didn't get at the root of the problem, since in the two years since then she had run all those credit cards up to the limit again. Her home equity consolidation loan had just enabled her to dig her hole deeper.

She wanted out. She had to find a better way. She made a list of debts and expenses and income, so she could see where she was at. It looked like this:

Home mortgage: $94,000 at 8% annual interest, with monthly payments of $705.

Car Loan: $9,500 at 12.5% annual interest, with monthly payments of $285.

Credit Card #1: $900, 21% interest, minimum payment $60, paying $100 per month.

Credit Card #2: $600,t 18% interest, minimum payment $30 paying $50 per month.

Credit Card #3: $4,200, 16% interest, minimum payment $150, paying $200 per month.

Rent-to-Own Furniture: Recently acquired, monthly payments of $280.

Amy had a total of $1,620 per month going out to debts. She set her debt reduction goal: Be completely out of debt, including mortgage debt, within 7 years. She started looking at how this could be done, using a series of simple ideas.

Simple Idea: She had a decent income, and could afford her present expenses (barely), so why not stop incurring ANY additional debt? That would certainly help keep the problem from getting worse. She cut up her cards and started paying cash only for things.

Simple Idea: Why not replace the over-priced rent-to-own furniture with good used furniture and apply that $280 per month to reducing the other debts. She used what little savings she had to do buy good used things and let the other furniture go back to the store.

Simple Idea: She read that the fastest way to reduce debts is to concentrate on the highest interest debt first. Systematically pay on that until paid, then apply all of what was going to that debt to the one with the next-highest interest rate, and so on.

Remember, she is able to afford the current expenses, so once she was rid of the furniture payments, she could apply the $280 that was going there to the highest interest rate card. In addition, if she cut back to the minimum payment on the two lower interest rate cards, she could apply another $70 to the highest-interest card. In other words, in addition to the usual $100 she was paying, she could afford to pay another $280 and $70 to it, for a total of $450 per month.

It took just a bit over two months to pay off the first card. Now she applied the $450 she had been paying on it to the second card, along with the $30 payment she was making. It took just another month-and-a-half to pay it off. Now she had $480 per month to apply to the last credit card, along with the $150 she was already paying. At $630 per month, it took just seven months or so to pay off that one.

Less than a year into her debt-reduction plan, Amy was down to just her car payment and mortgage payment. She had an excess $630 she could apply to those debts, now that the cards were paid off. In addition, she found ways to save on everything from her home owner's insurance insurance to groceries, which freed up another $100 per month to apply to her debts. That's $730 to apply to debts each month - in addition to the usual payments.

She found that she could refinance her home at 6.5% interest, pulling out enough equity to pay off the car loan. This made sense since she was going to pay off the house loan as fast as possible, and so avoid 30 years of interest. She did get a 30 year loan for safety. The payment was $645, which was $60 less than the old payment, even though the car was rolled into it and the mortgage was for $102,000.

Without the car loan, she wasn't required to keep collision coverage on the car. She dropped the coverage, deciding she could find a way to pay for any damage with cash. That saved her $60 per month. Now she had the $730, the $60 savings on the mortgage, the $60 savings from the car insurance, and the $285 that used to go for the car payment. That totaled $1,135 excess income she could apply each month to her mortgage, in addition to the $645 usual payment (and she was sure to get a mortgage with no prepayment penalty. She started paying $1,780 on her mortgage each month.

Less than a year into her plan Amy was clear of every debt except her home mortgage, and it didn't require any major lifestyle changes or a second job. Now she was getting excited. To speed things up, she took her $2,000 tax refund and applied it to the mortgage. She looked at an amortization table and was excited to see that paying $1,780 on her mortgage each month would pay it off in total within six years.

The idea of being entirely debt free was so exciting to her, however, that she added a couple more simple ideas to her plan. She would apply every tax refund to the mortgage, and any additional income from raises at work. She thought of this when she was promoted and got a raise of $300 more per month. She was living fine with her current income, after all, so why not apply the extra to the debt.

On the fifth anniversary of the start of her plan, Amy made the last payment on her home. She owed nobody in the world a penny now. She had been paying $2,200 each month towards the end, and was still living okay on the rest of her income. She decided to start putting $1,200 into an investment account each month. Properly invested, that would mean millions later in life.

That also meant that even after funding her investment account, she had $1,000 of "excess" income left over after normal monthly expenses. This represented not just vacations and things she could buy, but freedom too. Now she could build a little savings cushion, and comfortably consider changing jobs, or starting a business.

No debt at all, a fast-growing investment account, a home free and clear, and $1,000 extra to do what she wants with each month - all within five years. All by applying a few simple debt-reduction ideas. Life was much more relaxing for Amy now.

Note: This is part of the "Unusual Ways" Newsletter.
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Unusual Ways To Make Money | Your Personal Debt Reduction Plan