Digging Out of Debt Faster

Personal Questions

• Do you argue with your spouse over bills? With half of marriages ending in divorce and finances playing a key role in these dissolutions, this should be a hot button for taking corrective action.

• Is an increasing percentage of your income being used to pay off debts? It’s not uncommon for families to be spending several thousand dollars per year on interest charges that could otherwise be applied to basic needs. It’s an interesting paradox to note that while families will spend 10 percent of their income on interest payments, they can only “afford” to give one percent for charitable causes. These numbers should be reversed.

• Are your credit cards at or near their credit limits? Do you keep applying for new cards to expand your limits?

• Are you only paying the minimum balances due on your credit card and other revolving credit accounts? Getting out of the minimum-payment mentality is a requirement for sound debt management.

• Are you chronically late in paying bills? Nearly half the country fails to pay bills on time, but barring exceptional situations, we have a responsibility to pay vendors in a timely manner.

• Do you borrow to purchase items that you used to pay cash for? This is an early warning sign of future problems.

• Do you put off medical or dental visits or necessary expenditures such as car maintenance because you don’t have the money? Delaying true needs such as these often ends up causing much greater expenses in the long run.

• Would a job loss place you in immediate financial difficulty because of pre-existing credit card debts? The high interest becomes impossible to manage with a major reduction in income.

• Are creditors calling you and threatening repossession or other forms of legal action? The stress from these calls and notices can cause all types of fissures to develop in a marriage relationship.

• Have you avoided adding up your total debt out of fear? Sidestepping the problem doesn’t help to solve it.

Eliminate Your Debt — Accelerate It!

If you answered yes to any of the above, your debts are placing you in financial bondage and you need to begin the Accelerator Repayment Plan today.

The Accelerator Repayment Plan is a simple and straightforward approach to eliminating your consumer credit as rapidly as possible. How fast you eliminate your debt will partly depend on your circumstances, but it will also depend on how motivated you are to get out of debt and how committed you are to making the plan work.

Let’s consider the example of Tom and Patty, who have three credit cards with balances totaling $10,000 and a car loan for $10,000. Their information is presented in the table below. The minimum monthly payments total $590, but that would take about four years to be debt-free, and Tom and Patty would like to be debt-free more quickly. After reviewing their budget, they have determined that they will allocate $800 each month for debt repayment. Rather than repaying the debts in four years, this plan eliminates them in less than two and a half years, and will save a bundle in interest charges.

Seven Steps

Let’s review the seven steps that make up the Accelerator Repayment Plan:

1. Make a commitment to go no further into debt. If you can’t muster the discipline to avoid purchases that you can’t pay off immediately, cut your credit cards up.

2. Make sure that you have your $2,000 emergency fund set aside so that you’ll be able to hold to your commitment when “surprises” occur.

3. Develop a realistic budget that includes a monthly amount dedicated to debt repayments. Your budget should balance after taking this monthly payment into account. As you’re developing this plan to determine how much you can allocate to deficit repayment, use a debt calculator to consider different scenarios. As long as you know how much you owe and the average interest rate, you can play “what if” scenarios to see how long it would take to be debt-free at different payment levels. Visit www.VeritasFinancialMinistries.com to see how the Accelerator Repayment Plan can work in your situation.

4. The Accelerator Repayment Plan requires that you prioritize your debts for repayment. My preference, and the one that saves the most money, is to list your debts in order based on interest rate, with the highest-rate debt listed first. Some people prefer to list the smallest debt first, since it will be paid off relatively quickly, and they want to be able to celebrate a victory like that. Choose the method that will work best for you.

Accelerator Repayment Plan Example — Tom and Patty’s Debts

Every month you’ll make the minimum payment required on each of the loans, except for the loan at the top of the repayment list. This is the one you’re accelerating. In the example above, the minimum payment on the Visa bill is $120, but because Tom and Patty have committed $800 per month ($210 more than the minimum payment required on all loans), they can apply the additional $210 each month to the Visa card, for a total of $330. When the Visa bill is paid off, they’ll continue applying $800 each month to the outstanding debts. With the Visa bill gone, they can zero in on the Discover Card. By adding the $330 payment they were making on the Visa to the $60 minimum payment they’re making on the Discover Card, they have a new payment of $390. You can see how that amount will pay off the Discover Card in no time. You just repeat this process until the debts are eliminated!

5. You can reduce the time it will take to be debt-free even further by being creative about coming up with additional funds that can be applied to the Accelerator Repayment Plan. Consider having a garage sale or taking a temporary second job until the debts are eliminated. The plan will move as fast as you’re committed to it moving.

6. Be accountable to someone. This can be your spouse, but if you don’t have the discipline to stick with the plan on your own, take in a friend, family member, or pastor to help you stay on track.

7. Set up a visual system to show your progress, such as a chart on the refrigerator that shows your declining debt balances. Depending on the circumstances, it’s not uncommon for a debt repayment plan to take from one to five years, so a visual aid that tracks your progress can help you persevere.

Once you’re debt-free, think of the freedom of having $800 (or whatever amount you had allocated toward your debt) available each month for other purposes. You can pay your mortgage off early, save for retirement, start a college fund, and even have some fun!

Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at [email protected].