Debt Elimination Plan

1. Face the Truth

Be honest about debt. Face the hard facts about your debts. How much you owe and to whom you owe it. Hold yourself accountable for your debts and do not pretend that you are financially okay. Stop making the mistake of pretending that you are where you want to be financially. Denying your present reality only makes matters worse. Denial just leads to more bad debt. So it is time to be completely honest with yourself about your debts.

2. Stop Accumulating Bad Debt

After you have held yourself accountable for all the debt you have, put a stop to all your bad debts. Don’t take any more new loans. Stop accumulating bad debt. Whatever you purchase via credit cards must be paid off in full at the end of each month. No exceptions. 

3. Make a list of all Debts you owe

After putting all your bad debts on hold, make a list of all the debts you owe. Your bad debts are the ones that you are going to pay, that includes: credit cards, vacation loans, and residential expenses. Do not include your good debts such as; investment loans and rental property loans as they are paid for by someone else known as your tenant.

Good debts are debts that put money into your pocket. A loan for rental property is a good example of a good debt as the tenant will pay off the loan whilst still putting money into your pocket. Bad debts take money out of your pocket. Loans for vacations and school loans are some examples of bad debts as they take money out of your pocket.

4.– Next to each items listed make 3 columns:

          – Amount Owed
          – Minimum Monthly Payment
          – Number of Months 
Enter the appropriate numbers into each column. To arrive at the number of months, simply divide the amount owed by the minimum payment. 

 5. Make a visual picture of each Debt

Having a visual representation will make it a lot easier for you to determine an order of how your debts will be paid. The illustrations on the left should help you do that;

For each debt, you draw a quadrant as shown on the top of the page. Write the name of the debt in the upper left hand corner and the total amount owed in the upper right hand corner. The lower left-hand corner you write the minimum monthly payment and then divide the total amount owed by the minimum monthly payment and it should give you the number of months required to pay off the debt. Write this number in lower right hand corner and circle it in red.

For example, if you owe $2000 on your visa credit card and your minimum monthly payment is $100, then, $2000/$100 = 20. Your visa credit card loan will be paid off in 20 months. Do that to every item you have on the list.

5. Hire a Bookkeeper (Optional)

Bookkeepers are very important in facing the hard truths about bad debts. There are 3 important reasons why bookkeepers are important;

  1. They keep accurate, neat and orderly records which is vitally important if you are going to build wealth.
  2. Bookkeepers provide a lot emotional support during your harsh financial situation
  3. Rich people have bookkeepers on their team.

We recommend that you hire a bookkeeper, of course not everyone can afford one.

6. Determine the order for paying off each Debt

After you have completed a quadrant for each of your debts, determine what order you are going to pay off the debt. Look through all your quadrants and find the lowest number circled in red and write a # 1 next to it. Find the second lowest and write a # 2 next to it. Do that for all your debt quadrants until you have a number next to every quadrant. The quadrant with the number 1 is the first debt you are going to pay off and the quadrant with the largest number circled will be the one you pay off last.

One of the advantages to starting with the debt with the lowest number of months is that you can have your first “win” or success in this process as soon as possible. Once you get that first credit card (or debt) paid off, you’ll begin to see the light of day. 

7. Come up with an additional $150 to $200 per month.

 If you are serious about getting out of debt – and, more importantly, becoming financially free – then generating this extra money will not be difficult. If you cannot generate an additional $150 per month then your chances of becoming financially independent are slim.

 Pay the minimum amount on every debt you have listed EXCEPT for the one you’ve marked with a “1.” On this first debt to be paid off, pay the minimum amount due plus the additional $150 to $200. Keep doing this each month until your first debt is paid off. Scratch that first debt off your list. 

8.  Pay the minimum amount

Pay the minimum amount due on every debt you have EXCEPT for the one you’ve marked with a “2.” On this debt, pay the minimum amount due, PLUS the entire amount you had been paying on debt #1. For example if on debt #1 your minimum amount due was $40 and you added the additional $150 then you were paying a total of $190 each month. On debt #2, if the minimum amount due is $50, you will now pay $50 plus $190 or a total of $240 per month. 

After a debt is paid off then take the total amount you were paying on that debt and add it to the minimum amount due on your next debt to get your new monthly payment. You will be amazed at how quickly this amount adds up and how quickly your credit cards, car loans, etc. are paid off.  

9. Move On to Debt #2

You have successfully paid off debt #1, now turn to debt #2. For debt #2, pay the minimum monthly payment required for all other debts, pay the minimum required for debt #2 plus the full amount you were paying on debt #1.

For example: for debt #2 your payments should be.

  1. The monthly payment required for debt #2
  2. The minimum you were paying on debt #1
  3. The additional $100-$200

Now you are paying more than the minimum monthly payment and the extra $100 to $200. With each debt you pay off, you accelerate your payments on the next debt. Continue every month until you have debt #2 paid off. Go back to your debt chart and put a big red X on debt #2. You have succeeded again. Celebrate!

Move on to debt # 3. For debt #3, you pay as follows:

  1. The minimum monthly amount payment required for debt #3
  2. The total amount you were previously paying on debt #2, which included:

-The minimum monthly payment you were previously paying debt #2. -The minimum monthly payment you were paying on debt #1. -The additional $100 to $200.

Continue each month until paid. Continue this process for each debt, always paying the minimum required plus everything you were paying towards the previously paid off debts.

Continue this process until all the bad debts on your list are paid off.  

10. The Final Amount You paid on Your Debt – Invest it 

 By this time the monthly amount you are paying on your last debt is likely to be quite substantial. Keep paying that amount every month. Except now – instead of paying it to creditors – you pay it to yourself for only one type of purchase: assets that give you positive cash flow each month. Once you have paid off your last debt, take the total amount you were paying on the last debt you were paying and invest it. Continue investing each month. This will be the starting point of your debt-free life and financial success.

Remember this is a process and in order for this formula to work, you have to stick to it month after month. Do not stray from the process because your chances of becoming debt-free will diminish.

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