Debt Roll-Down – Part 1 of a 3 Part Series  - 4/1/2004 - Mortgage Loan Refinance Debt Equity

Debt Roll-Down – Part 1 of a 3 Part Series

Category: Business Financing
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Debt Roll-Down – Part 1 of a 3 Part Series

We have all heard the saying, "Those that understand interest collect it, and those that don't, pay it." So the question is, "Are you earning interest or paying it?"

As contractors, we all know how important it is to avoid unproductive debt in our businesses. Sure, we float expenses from month to month on our current projects by managing cash-flow. Sometimes short-term debt (debt that will be paid off quickly and before much interest accrues) is necessary so that we can move forward on our projects. We may have a Home Depot® credit account used for supplies that we pay back each billing cycle, or something similar. These are "good debts" – they help us make money. But long-term debt (debt that will not be paid off quickly and accrues a lot of interest, especially at high interest rates) can be devastating to the success of any business because it can significantly increase expenses and thus lower profits). For example, did you know that the way some credit card payments are structured, if you make the "minimum payment" every month, you will NEVER pay off the principal balance? Others are structured to be paid off in 30, 45, 60, even 80 years! Obviously, high interest rate, long-term debt is VERY EXPENSIVE.

In personal finance, the same principles apply. We might have credit cards, mortgages, auto loans, signature loans, student loans, personal loans, or any other kind of debt that is not contributing to our wealth. They all increase our expenses and limit our ability to effective save and progress toward our financial goals. In order to reach our financial goals and dreams, we must eliminate unproductive debt as quickly as possible.

The debt roll-down concept is simple and it is the quickest and most powerful way to eliminate unnecessary debt. The first step to making it work is to set up a debt elimination calendar. To make one, mark off several columns on a piece of paper. In the first column on the left, write the names of the months, beginning with the upcoming month. At the top of the next column, write the name of the creditor you want to pay off first. It may be the debt with the highest interest rate or the one with the earliest pay-off date. List the monthly payment for that creditor until the loan is repaid as shown in the illustration below. At the top of the next column, record the name of the second creditor you want to repay, and list payments due each month. After you have repaid the first creditor, add the amount of that monthly payment to your payment to the second creditor. Continue the process until all loans are repaid.

Debt-Elimination Calendar 2

You can see that once one or two debts have been paid, the payoff of the others is accelerated very quickly. Keep at it and your debts will be gone before you know it. Most of us have the tendency to spend any additional money we have. If we pay off a credit card and have an extra $20 a month, it will usually go toward an extra restaurant meal or pizza night. If we pay off a car, it feels like it's time to buy a new one. But if debt elimination is a priority, by using a little discipline we can quickly pay off debts. And as you can see, it doesn't require us to increase our monthly payments throughout the whole process!

During the next two months, we will discuss additional ways to enhance your debt elimination plan and accelerate the payoff of your debts. By integrating these concepts, many people can eliminate all of their debts, including their home mortgage in 7-12 years without increasing their monthly payments!

We also want to make you aware that there are a couple of resources you can use to help you implement your debt elimination plan – or even do all the work for you. For example, you can do your plan electronically. A phenomenal software program called MVelopes® will help you track all of your expenses and allow you to track a debt roll-down plan as described in this column. To find out more, go to www.contractormd.com and click on the "Spending 
Management Plan" section on the bottom right corner of the screen.

There is also a fully-administered debt elimination plan available. This plan will do everything for you! This plan will give you a comprehensive analysis of your current situation and a specific plan for paying off debt. It will calculate which debts to pay off first, second, etc. so that you pay them off in the quickest way possible. It will also make all of your debt payments for you. You don't have to track anything. You will receive monthly reports showing your debt elimination progress. Many people prefer the fully-administered plan because it helps keep them disciplined and on track. For more information about the fully administered plan, you can visit 
www.contractormd.com and click on the "Financial M.D." link on the right side (in the middle of the page). Then choose the "Debt Elimination Services" option.

Most importantly, to eliminate debt effectively, remember that you have to stop accumulating new debt. Make the decision that whatever you buy with credit cards (starting now) will be paid off in full at the end of each month. Make no exceptions.

Be sure to check out next month's newsletter for ways to enhance your debt elimination plan and pay off those debts even faster!

1 - This explanation of the debt elimination calendar was taken from "One For the Money" by Marvin J. Ashton © 2004 by Intellectual Reserve, 
Inc. All rights reserved. 

2 - This debt elimination calendar was taken from "One For the Money" by Marvin J. Ashton © 2004 by Intellectual Reserve, Inc. All rights reserved.