After my 3rd divorce I walked out with $15,000 in credit card debt. To preserve my credit score I had no choice but to take the bills and make sure they got paid. I spent the next 5 years working two jobs slowly paying it off. In 2003 I met Cindy and still had a little over $7,000 left to pay. Cynthia was a financial mess like me. She was divorced and had about 6k in credit card debt. Plus she had a car and house payment, two young kids, and all the regular bills that comes with all that.
To write this piece I went to ssa.gov and clicked on “Review your Earnings Record”. I made $39,000 in 2003. Think about it, 39k BEFORE taxes. After rent, utilities, food, entertainment, car payment, gas, insurance, and everything else, there isn’t much left over to pay off debt, much less create an “emergency fund”. To make matters worse, 2003 was when ADT Security left Texas and took my job of 17 years with it. In 2004 I made $31,000, $23,000 in 2005 and a $25,000 in 2006. Cindy made 30K in 2003 and the same, for the next 3 years.
After we got together I soon realized we needed help getting all our debt under control, create an emergency fund, and we didn’t have a lot of extra money to get any of it done.
I paid $99 for a book and some CD’s titled Transforming Debt into Wealth. This was 20 years ago and these days this information is all over the Internet.
It’s no secret how the plan gets you out of debt, it uses what it calls the Debt Snowball Plan or Cascading Debt Elimination. This plan is the simple process of putting your debt in a strategic order to help you pay it off the fastest way possible. Many financial bloggers have discussed this plan at one point or another, so the information isn’t a “copyrighted” or a “protected” financial strategy.
This information changed my life, so lets get into it…
The best way to describe how the Cascading Debt Elimination plan works is to think of rolling a snowball downhill to make a snowman. As you roll, it picks up snow, grows larger, and builds momentum. The snowball in the system is what is called your Accelerator Margin. It is recommended you try to use 10 percent of your monthly net income for your Accelerator Margin. If your check is $1,000 every two weeks then your Accelerator Margin would be $1,000 x 2 x 10%, or $200. Of course, if your married, you will want to combine your incomes to get your Accelerator Margin.
The first thing you need to do is get all your debt’s together. Things like car payments, mortgage, credit cards, student loans. Any bill you have that you are making monthly payments on. You will need the Name of the debt, the total balance, and the monthly required payment.
The second step is to take a piece of paper and create the chart, or print a blank copy. You will want to complete at least steps 1-3, filling out the first five columns to get your debt payoff priority, or payoff sequence. Filling out columns six and seven is a calculation of the approximate time it will take to become debt free.
A. Your Accelerator Margin
Usually 10 percent of your monthly net income: ____________________
1. Write down each debt in the first column below, total balance in column 2, the bill’s minimum monthly payment in 3.
2. Divide the total balance by the monthly payment, putting the answer in column 4.
3. Prioritize your debts in column 5 by starting with the lowest division answer from column 4, until are all numbered.
4. Column 6 is used to show the accumulated Accelerator Margin roll-up from debts 1, 2, 3, 4, … as they are paid off (including the monthly payment).
5. Column 7 is column 2 divided by column 6. Column 7 is an approximation.
Here’s the chart and an example, which is explained below. You can also save this PDF file of a blank copy to your hard drive and print it or just print it from my Google Drive.
In our example, in the Priority Payoff column, Car 2 is our #1. Add your Accelerator Margin, again, our example uses $400, to the regular payment for Car 2. Now simply divide the balance on this loan ($7,250) by the Accelerator Monthly payment amount of $891.08. You can see that it will take approximately nine months until car 2 is paid off.
Since you’ve pad off car 2, you have now recaptured it’s normal $491.08 monthly payment and it becomes part of your Accelerator Margin. So your Accelerator Margin is now $891.08. Car 1 is Priority #2 and has a regular monthly payment of $671.90, and when added to your new Accelerator Margin, the Accelerated Monthly Payment on car 2 is $1,562.98.
As you can see in our example, even though car one has a $12,350 balance, it will be paid off in approximately 9 months. Once you have your Payoff Priority values you can work from 1 to the last to calculate the values of columns 6 and 7. Notice in the example the last bill, the mortgage, has an Accelerated Monthly Payoff of $2,796.73.
The key to making this system work is to have a healthy Accelerator Margin month-to-month, building out the chart to find what comes first and what comes last in the payoff sequence, and then folding each bills monthly payoff into the Accelerator Margin to add to the next debt.
Tips and Tricks
Debt-freedom has three benefits.
First it allows you to create an emergency fund. You want to have at least 6 months worth of salary in your checking account. Cash Is King. When your debt-free you want to stay that way and to do that you have to have cash.
Second, you must fund retirement accounts like your Traditional and Roth IRA's, 401k, Brokerage Account and HSA. Buy quality dividend paying equities. Stock and bond dividends, when added to your Social Security payments, can produce job replacing income.
And thirdly, you want to rest easy and sleep well, knowing your family is taken care of.
Here’s the chart and an example, which is explained below. You can also save this PDF file of a blank copy to your hard drive and print it or just print it from my Google Drive.
| Name of Debt | Total Balance | Monthly Payment | Division Answer | Payoff Priority | Accelerated Monthly Payment | Month to Payoff |
|---|---|---|---|---|---|---|
| Mortgage | 99,000 | 733.26 | 136 | 9 | 2,794.73 | 36 |
| Mastercard | 1,700 | 36.00 | 50 | 6 | 1,678.54 | 2 |
| Visa | 3,287 | 65.76 | 50 | 7 | 1,766.28 | 2 |
| Discover | 1,550 | 31.00 | 50 | 5 | 1,644.56 | 1 |
| Store Card | 850 | 17.00 | 50 | 4 | 1,613.54 | 1 |
| Discover | 1,122 | 33.66 | 33 | 3 | 1,596.64 | 1 |
| Car 1 | 12,350 | 671.90 | 18 | 2 | 1,562.98 | 8 |
| Car 2 | 7,250 | 491.08 | 15 | 1 | 891.08 | 9 |
| Home Equity Loan | 23,530 | 316.69 | 84 | 8 | 2,060.97 | 12 |
| Time to Payoff | 6 Years |
| Total Debt (total column 2): | 151,639.00 |
| Total Monthly Payments (total column 3): | 2,394.83 |
| Total Accelerated Payments (A + D): | 2,794.83 |
In our example, in the Priority Payoff column, Car 2 is our #1. Add your Accelerator Margin, again, our example uses $400, to the regular payment for Car 2. Now simply divide the balance on this loan ($7,250) by the Accelerator Monthly payment amount of $891.08. You can see that it will take approximately nine months until car 2 is paid off.
Since you’ve pad off car 2, you have now recaptured it’s normal $491.08 monthly payment and it becomes part of your Accelerator Margin. So your Accelerator Margin is now $891.08. Car 1 is Priority #2 and has a regular monthly payment of $671.90, and when added to your new Accelerator Margin, the Accelerated Monthly Payment on car 2 is $1,562.98.
As you can see in our example, even though car one has a $12,350 balance, it will be paid off in approximately 9 months. Once you have your Payoff Priority values you can work from 1 to the last to calculate the values of columns 6 and 7. Notice in the example the last bill, the mortgage, has an Accelerated Monthly Payoff of $2,796.73.
The key to making this system work is to have a healthy Accelerator Margin month-to-month, building out the chart to find what comes first and what comes last in the payoff sequence, and then folding each bills monthly payoff into the Accelerator Margin to add to the next debt.
Tips and Tricks
Debt-freedom has three benefits.
First it allows you to create an emergency fund. You want to have at least 6 months worth of salary in your checking account. Cash Is King. When your debt-free you want to stay that way and to do that you have to have cash.
Second, you must fund retirement accounts like your Traditional and Roth IRA's, 401k, Brokerage Account and HSA. Buy quality dividend paying equities. Stock and bond dividends, when added to your Social Security payments, can produce job replacing income.
And thirdly, you want to rest easy and sleep well, knowing your family is taken care of.
In our example we freed up $2,796.73 per month, more than enough to sock away the money needed to pay our property tax and insurance every year, maintain a healthy 20k emergency fund, and fund retirement accounts.
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