In order to eliminate debt, you must
consistently spend less than you make,
not incur any new debt, and make payments towards reducing your
existing
debt. To do this, you need a spending plan or a budget.
Maintaining a budget
can be a daunting task- tracking purchases, manually recording
transactions,
balancing several different accounts, etc.
The list goes on and on. In our near cashless society, it’s
harder than ever to keep
track of every purchase. It doesn’t have to be difficult though,
by using advanced
computer technology, it’s easier than ever to create and
maintain a spending plan
that will help you quickly eliminate your existing debt, and
avoid incurring any new
debt.
The best way to eliminate debt is using the
Debt Roll-Down Method partnered with
your Envelope Budgeting System.
The debt roll-down principle works by determining the total
monthly payment you
can make toward debt repayment. Each time you pay off a debt,
you add the
payment for that debt to the monthly payment for the next
priority debt.
This will accelerate the rate at which this debt is paid. When
the second debt is
paid, you add the payment you have been making on this debt to
the monthly
payment for the third priority debt. This process is continued
until all debt has
been eliminated. The key is to continue making the same
aggregate debt payment
each month. Following this debt elimination principle can often
assist you in
eliminating all of your debt, including your mortgage, in as few
as seven to eight
years.
There are two ways to prioritize debt
repayment: smallest outstanding balance
to largest outstanding balance or highest interest rate to
lowest interest rate.
Because, in most cases, you will eliminate your debt faster if
you begin with
the debt carrying the highest interest rate, most financial
advisors agree you
should prioritize your repayment based on the interest
rate—highest to lowest.
Traditionally, many people managed their money
by dividing their cash into
several paper envelopes. An envelope for food, entertainment,
utilities etc.
They then spend their money from these envelopes. They always
knew how
much money they had left, and how long it had to last. Today the
best way
to create and manage your Envelope Budgeting System is with
the
online budgeting system
Mvelopes Personal.
Mvelopes Personal is a
breakthrough in budgeting and spending management that
modernizes this
same envelope budgeting concept using advanced Internet
technology.
You can quickly set up
your rapid repayment plan by
following these steps.
STEP 1: Create a list of all debt.
The first step is to create a list of all debt. This list should
include the name of
the debt, the current outstanding balance, the planned monthly
payment, and
the interest rate for each. Begin with the debt having the
highest interest rate
and end with the debt having the lowest interest rate.
STEP 2: Check your monthly spending
account allocations.
When you set up your monthly spending plan, you should create an
envelope
spending account for each debt on your list.
Each month, you will make your debt payments from the spending
accounts
you have created. After you pay off the first debt, you will
need to make an
adjustment by adding the monthly allocation for that debt to the
monthly
allocation of the spending account for the next priority debt.
For example, let’s say your debt with the
highest interest rate is a department
store credit card. The amount of your monthly payment for this
debt is $75, so
the amount of income you allocate each month to the department
store spending
account for that debt is $75. Your next highest priority debt
based on interest
rate is a credit card. For this debt, your monthly payment is
$125, so the amount
of income you allocate to this credit card spending account each
month is $125.
After four months, you have paid off the department store debt.
When you
complete your monthly adjustment, you will transfer any
remaining balance from
the department store spending account to the credit card payment
envelope.
You also will adjust the monthly income allocation for the
credit card spending
account by adding the $75 to the $125. You will now be making a
monthly
payment of $200 on the credit card. This will be repeated each
time a debt is
paid off. Before long, you will have eliminated all of your
consumer debt and
will be making much larger mortgage payments.
STEP 3: Accelerate your debt payment
with monthly spending
account transfers.
Once you have created your debt-elimination plan, you can begin
to accelerate
your debt repayment by transferring savings from your spending
accounts to your
debt repayment accounts. Many people have found they can save an
additional
10% each month by using an envelope system. If you have a net
monthly income
of $5,000, the additional amount you can save using the envelope
system could
be as much as $500. Imagine how quickly you can eliminate your
consumer debt
if you are adding 10 percent of your net monthly income to your
debt payments.
For most people in America, a significant
portion of their net monthly income is
dedicated to the payment of interest. Imagine how much money you
can save
and invest if you are not paying interest. For most, this would
represent several
thousand dollars each year. Invested properly, this additional
money may make
a significant difference in the lifestyle you choose later in
life. Using an envelope
system to successfully implement the debt roll-down principle
will help you
accomplish this objective.
With Consumer debt at an all time high, it’s
no wonder more and more people are
looking for help with personal financial management, debt
reduction and spending
management. And given the substantial debt carried by the
average family, it’s not
surprising that Financial Freedom is at the forefront of the
American mind – Among
the top New Year’s Resolutions for 2004 were increased savings,
debt reduction,
and increased investments.
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