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How To Be Debt Free ASAP

Updated: Jun 4

Debt Free Strategy
A Frank & Ernest Conversation

It's common knowledge that debt and financial problems are the number one cause for stress and worry in our lives. 


How to be debt free ASAP, a Frank and Ernest conversation.


Recently I met with "Frank and Ernest" who had amassed combined total debts of $127,000 across their credit cards, home loan and personal loans. 


Frank told me that they expected to be debt free in fifteen years (based on his mortgage etc). 

"How does being debt free within the next five years sound?' I asked.

 

A Frank and Ernest Conversation

 

Frank: “You can't be debt free in 5 years or less if you own a home”. 

Me: “Really, do you mind if I use you as an example?”

Frank: “This will be interesting”

Me: “Can you save 10% of your gross income?”

Frank: “If it means I will be debt free in 5 years absolutely.

 

The following table shows the Frank and Ernest's financial income and expenses position

Clients

Gross

Tax Approx

Net

Spend

Frank Income

$55,000

$10,000

$45,000

$2,400 (Fixed)

Ernest Income

$35,000

$4,000

$31,000

$2,000 (cash)

 

 

 

 

$1,900 Other exp

Total

$90,000

$14,000

$76,000

 

Per Month

$7,500

 

$6,300

$6,300

Frank and Ernest agree to save 10% of their gross income per month = $750 and they find this by making savings within on their current expenses etc…

Summary of Debts Held by the Client

Item Description

Major Debt

Monthly Repayments

Interest Rate

(Factor)

Payment Ranking

House

$100,000

$1,100

10.5%

90

5th

Car

$20,000

$450

15%

44

4th

Myer/Store Card

$2,000

$350

21%

5.7

2nd

Credit Card

$1,300

$300

19%

4.3

1st

Personal Loan

$4,500

$200

23%

22.5

3rd

Total

$127,800

 

 

 

 

The following is the sequence to pay down individual loans so to be debt free in less than 5 years.

As with many things in life the simple the strategy, the easier it is to implement and the more profound its impact.

 

Starting with the debt with the least owing, pay this off and then with the interest you are now saving (by paying off the debt) add this towards paying off your next debt etc… lather, rinse, repeat until all your debts are paid off.

Item Description

Repayment Progression

Debt Clearance

Time line

1st Credit card

Outstanding balance $1,300 repaid at

$1,050pm= $300 (repayment rate) + $750 savings

1.5 Months

Month 1.5

2nd Store Card

Outstanding balance $2,200 repaid at

$1,400pm =$1,050 from available savings i.e. $750 per month + $300 repayment saved as 1st Credit card paid out+ $350 (repayment rate) on store card.

1.5 Months

Month 3

3rd Personal Loan

Outstanding balance is $4,500 repaid at $1,600pm = $1,400 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out & $350pm repayment rate on the Store card + $200 personal loan monthly repayment rate.

3 Months

Month 6

4th Car Loan

Outstanding Balance $20,000 repaid at $2,050pm =$1,600 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out + $350pm repayment on the Store card + $200pm repayment personal loan rate + $450pm repayment car loan rate.

10 Months

Month 16

House Loan

Outstanding Balance $100,000 repaid at $3,150pm =$2,050 from available savings i.e. $750 per month + $300pm repayment saved as 1st Credit card paid out + $350pm repayment rate on the Store card + $200pm repayment personal loan  rate + $450pm repayment car loan rate+ $1,100pm repayment home loan rate.

32 Months

Month 48

Some people may argue one can also achieve the same outcome by consolidating all your loans into one big loan at a lower interest rate. While this may be so in theory, the real issue is that people become more laissez-faire, thinking they can now slack off in their repayments or go out and spend more.


The human tendency is to again go out and spend on the card or on an unforeseen expense or emergency (if they don’t have an emergency expense savings account).Due to the minimum debt repayment set by the financial institution (compared to what the individual is paying as a whole now) and simply because its available, yes you guess it… it goes on to the credit card again and ultimately the borrower ends up in more debt.


By implementing the debt reduction method of one debt at a time; one’s confidence builds through reinforcement as the evidence of progress reveals itself, (releasing debt burden) one debt at a time.

Paying off debt and never owing it again is a truly liberating experience. I encourage you to embrace this approach if you are lost and confused when it comes to how to best pay out your debts.



This post was written by Me, as such they are my personal views and not financial or general advice.


You should always seek independent financial advice when it comes to choices about your personal finances. This is one area of your life where it’s worth paying for it to be done right.

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