Debt Reduction Plan

What is a debt reduction plan compared to a debt management plan. First will give a debt reduction plan and what must be done to reduce or eliminate debt. Then once debt is gone will discuss a debt management plan to put into place.

Article Link:
https://www.incharge.org/debt-relief/debt-management/debt-management-program-template-debt-relief/ By Tom Jackson

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Charles McDonald: 0:03

Hello, I'm your host, Mr. Chuck, a retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination debt reduction plan, what is a debt reduction plan compared to a debt management plan? First, we'll give a debt reduction plan and then what must be done to reduce or eliminate debt, then once debt is gone, we'll discuss a debt management plan to put into place, I want to start off at the beginning here and just say that a debt management plan, if you would look that up on the internet is basically the same as a debt reduction plan. They want you to get a credit advisor use one of these agencies, and they'll negotiate lower interest rates on your credit cards, and they take care of it and you pay them a fee. That is not what I'm talking about. The debt management plan that I'm talking about is how do you manage your debt, so you don't get into trouble in the future. And I couldn't find any article out there that talked about that. So what is a debt reduction plan? A debt reduction plan is what you put in place, it's your guidelines to help you stay focused on getting your debt under control. That's all this is just some guidelines you put in place that you follow for a period of time, until you get your debt paid off. So what's my debt reduction plan, the one I've been talking about for the last almost five years now is this. One, quit using credit to make the minimum payment on all your credit, credit, I mean, credit cards and or loans, including your mortgage payment, car payments, personal loans, all those type of things, make the minimum payment. I know that doesn't sound like that's what you should do. Because everybody says if you got extra money every month, pay that extra $50 towards that big bet. Maybe the highest interest rate one, maybe it's a credit card, and try to pay it off as fast as possible.

Unknown: 2:56

But I'm not gonna do that. We're gonna make the minimum

Charles McDonald: 3:00

payment because the rest of the plan is gonna guide you into what you're going to do to pay off your debt. Three, set up an emergency fund, an emergency fund is nothing but a savings account. It could be at the same bank where you have your checking account, if you don't have an emergency fund has the need to do that. Quit using credit, make the minimum payment, set up your emergency fund, and build it up to a minimum of $1,000. And that's going to get you started. Why do you need a emergency fund? I when I was younger, I had a little bit of savings, but it usually didn't wasn't enough to cover whatever I needed. It was the last thing because what I was doing was paying all my extra money towards that credit card that I was trying to pay off. Or that loan I was trying to pay off, whether it was a car loan, motorcycle loan or credit card, whatever it was, and then I didn't have any money as something would happen. And maybe I would need to buy groceries or put gas in the car and I came up short that particular month. And that happened No More times than not each and every month. I miscalculated I miss plan. I thought I had more money than I had and I didn't I had that surprise bill I forgot about so you have yourself an emergency fund. Build it up to a minimum of $1,000. Then once you reach that point, you continue building it up until you have$4,000 1000 is your minimum you never want to go below 1000 4000 Is your maximum you're not gonna go over 4000 out, unless you want to, you can set up anything you want to do. Once you reach that 4000, the difference, the 3000, the 4000 minus 1000, the 3000 difference, once you have all your monthly bills paid up, and everything is looking good, he got that 4000 in there, and it's been in there for a week, you don't see any surprises coming along, you take that 3000, you apply it to one of your debt that you're trying to pay off, then you just repeat that process, you build the emergency fund up again, till you have another 4000. And then you apply it to one of your debt. So

Unknown: 5:45

why does this work works because

Charles McDonald: 5:49

you're no longer increasing the amount of credit that you're have. So you're not going further into debt because he quit using credit, you're making the minimum payments. So that allows you frees up some money, sometimes very little, sometimes more to fund your emergency fund, you're building an emergency fund up to 4000. And the time that you're doing that, between 1004 1000, your emergency fund is just bigger, bigger and bigger. And something would happen, your car break down, you have an accident, somebody gets injured, and you have a bill that pops up that's unexpected unforeseen, you have up to $4,000 you can use to pay for that bill. Now, most of these so called emergencies are somewhere under $1,000. And the average person in America cannot even cover a surprise event bill of $400 or less. So you're going to be better off than most people if you just have the minimum of $1,000. And you just keep doing that over and over. Now, which credit Do you pay off first? Or how do you apply the money? How do you choose how to how to pay off your debt. Most people gonna say you want to pay off the debt with the highest rate of interest, which are generate credit cards, personal loans, payday loans, things like that, once you get those under control, then you work on car payments, because a car has gone down in value. And if you get if you owe more on the card and what the value of it is you can trade it in without going further into debt. And that's a bad thing. So you want to get rid of those car payments, because generally they got the next highest rate of interest, probably 789 percent, unless you have bought a new car brand new, and you got a five or six year loan zero rate of interest, which case you save that for last because you're not costing anything. The only reason you want to pay off a zero interest loan is because you don't want to have that principal amount or that monthly payment. They're impeding on your budget and painting on money that you could borrow in the future. For something else that you may want, such as a home, second home, motor yacht boat, whatever the case is, that will, you know, your credit is based on your income. And the more credit he got, the more income you need. So the less credit you have the you can get by and borrow on money on a lower rate of income. Okay, that covers the debt reduction plan. Now we're gonna go over real quick, quit using credit, make the minimum payment, start emergency fun, minimum 1000, maximum 4000. Apply the maximum you know the difference between the minimum maximum to one of your higher rate of interest. As far as how to apply it there's the snowball method, which is the pay off the lowest balance first so you feel like you're making some achievement and then there's the Avalanche method to pay off the highest interest rate first so that you save more money. If you're just getting started the very first time you want to pay off the credit card with the lowest bounce. And if you got multiple credit cards that you might be able to pay off with that first $3,000 Do that first. Once you pay off a credit card, do not cancel it. Leave it open but you're not done. To use it, it'll go a year, maybe longer, they'll send you a notice saying we're going to cancel your card for inactivity, and then do one small charge on it 20 $30 pay it off, and you're good for another year or so. But the reason you don't cancel is because that's available credit, your income to credit ratio looks good, because you have this large amount of credit based on your income, that you're not using it. And that makes you a better risk for a lender. Also down the road within three months, six months or whatever, one of those credit cards may send you an offer, where you can do a balance transfer from another credit card to that credit card for a fee of say 5%. But have 12 months to 18 months of no interest on that balance and you want a zero balance, you want to make it easy for them to compute. And then you transfer from a higher rate card to that card, the amount of money that you can pay off in that time span, whether it's one year or 18 months. Now, what you got to look at your budget, you got to look at what your minimum payments can be divided by that number of months, when can you get it paid off, you can go a little bit higher than that. But you want to make sure you get paid off within before the end of that time period. So you're gonna use a credit card for your advantage, you're gonna make it work for you, instead of you working for them. That's the idea here. Uh, once we get all that done, now you have to have a debt management plan, you got most of the work already done. When you were setting up your debt reduction plan, because you had to identify the type of debt you had, what it was, how much you owe, when's the due date? What's the rate of interest? And you wrote, we put those in order by maybe interest or bounced due or whatever the case, you know, what type of debt you have, you have, say you had five credit cards that you owed a balance on of 5000 or more, and you got them all paid off. That's good. You're making progress. Now you gotta look, do you have to car payments, do you have an equity line of credit on your home, because that generally has a higher rate of interest. And it's an adjustable or variable rate loan, which means as the mortgage interest rates go up, the your line of credit, interest will go up. So between the car loans, and that line of credit on your home, those are the next ones you need to focus on to pay down and pay off your first mortgage, or even a second mortgage. If you have a fixed rate meanings, the same rate of interest and never changes, you can focus on that at the ferry. And when you get everything else under control. So in order to have a debt management plan, I'm calling it a debt management plan. But it's really a cash management plan. How much money do you have coming into your household? What are your monthly expenses? What can you put aside to save and that number gets bigger as you pay off your debt? How long is it going to take you to save up to buy a big ticket item such as a new car, a boat, motorcycle, maybe a vacation home? Whatever the case would be? How long is it going to take you to save money to have a large down payment. Because our management of our debt is we want to reduce the monthly payment as much as possible. Meaning we want to borrow the least amount we can possibly get by on the less you borrow. The less your monthly payment the easier it is to manage. And if you're a two income household, and then all of a sudden you're a one income household. If you borrow based on one income, you're not gonna have as many problems as in if you borrowed your loans based on two Do incomes, and then all of a sudden, whatever the reason you have one income, so we're want to manage our debt by using larger down payments, when we were if we have to borrow money to purchase something, we want to make a larger down payment, if it's gonna be a home, you want to try to get 15 or 20% down. So you don't have to pay that mortgage Premium Mortgage Insurance, you want to try to avoid paying X that does cost you a lot of money on a monthly payment. And you want to get your monthly payment down to a manageable amount that's not going to kill your monthly budget. And you got to look at inflation over time, things are gonna cost more five years, 10 more years down the road. If you have a 20 or 30 year loan, granted, you're may get some pay increases, but you may not, your income could go down also. But with pay increases that might help you keep up with some of that. But every year, there's gonna be some delay between your pay raises and inflation, you need to have some extra money in your budget to pay for things such as groceries, gas, insurance, things that can go up a lot faster than your income. So it's not really a debt management plan. Yes, you're managing your debt, but it's based on how much cash you have. So that's why it's important to track all your things that come in and go out of your household, all money in all money out. You need to track and you need to keep up a budget. Even when you have all your debt paid off, you still need to do a budget, so a whole lot easier. But sometimes he may be your budget may be$1,000 a month into your savings, which you put into a high yield because now you have more than $10,000. So he got it in a high yield. But all of a sudden, you're coming up short on cash, that 1000 a month now should be adjusted down to $800 a month. Because of inflation, because of groceries and gas and other expenses that's gone up. But your income has remained the same. It's a matter of keeping control of your finances. And that's what a debt management plan. And my book is, I have a link in my show notes. For a d y i DIY, yeah, do it yourself plan. And that's basically the same thing a counselor is gonna do, but you do it yourself. It's doable. I talked about it in the past. That's basically what this podcast is all about. Create a spreadsheet, determine debt management strategy, negotiate lower interest rate and limit expenses, track your progress. Eliminate expenses means keeping track of everything that you spend money on, and try not to buy things that you don't actually need. And part of that is before you spend more than$100 on an item you got to ask yourself, do you really need it or not? I'll be back in one moment with my final thoughts are the articles are referred to in my episodes have a link in my show notes. If you're interested in checking out the software that I personally use to get my debt over control. It's in my show notes under shop financial, you need to copy and paste the link and it will take you to the website. Any questions you can just contact me through that particular website. If you value this podcast and I like to make a contribution, I had a contribution link in my show notes also, give whatever you feel is appropriate for the information I am providing. I thank everyone for listening to my podcast, a debt reduction plan. It's a plan that sets the guidelines for what you're gonna do to reduce your debt. Quit using credit, make the minimum payment, create emergency fund marches, see find a minimum of 1000 Maximum 4000 Take the access to 3000. Once you have everything paid up on your monthly bills and everything and apply that 3000 to one of your debt, repeat until your debt is paid off. That's a debt reduction plan that's gives you guidance guidelines and some what to do with limits, to focus on paying off all your debt, a debt management plan. And it's the same as a cash management plan. It's tracking all the income into your household, and all the expenditures out of your household, reduce your spending. So you can increase your savings, the faster you can build up your emergency fund, the sooner you'll be able to apply it to your debt. So you're going to have a period of time, whether it's one year, three years, are you gone to limit your spending, I'm not saying that you're gonna go without, but you're trying to reduce your spending from things you don't absolutely need to do, in order to say more money to pay off your debt. So track everything, have a budget, know where your money's going, and how much it's going. And eventually, you'll even know when it's going, earning a month, middle of the month, end of the month, have a plan on which debt, you're gonna pay off first, high interest, lowest balance, maybe the first one is the lowest balance, and then after that the second ones, and they're on is gone be the highest interest, once you get your credit cards paid off, don't pose any of them, because that's gonna hurt your credit rating. As I said earlier, they might offer you a balance transfer, where you have at least a year or 18 months of no interest on that amount of money. And you just pay the transfer fee, which usually made up within one to one to two months of not paying the interest, it all comes down to what you want to do this, you could pay off your debt really quick, if you reduce your spending down to the bare minimum. Or it may take you a long time, there's people out there that may take three to six months just to get to the point where they're not using credit. If you're using a credit card to pay a monthly bill, you got to stop doing it. Because that's why you're in such a problem. And it may take your while but don't give up. Look for ways to not spend money on something else. And then you know, free up the cash to pay that monthly bill. And if you've got tracking and a budget in place, you'll know exactly how much money you need a month, the month, the month to pay your monthly bills. And, and which includes all the minimum payments on your credit cards and all the debt year. Then as you pay these things down, the amount of cash that you have to save is going to increase gradually over time. And it's going to speed up and towards the end is going to us faster, faster and faster. And like okay, I'm when I got down the pan off my mortgage, I had my credit cards paid off, my car's paid off, my line of credit paid off and I was on my final mortgage and I had about six or seven years left on probably, I don't know 50,000 or so. And man, I paid that off in a hurry maybe three or four months. Because I just kept doing the same thing. My build up my emergency fund faster, which allowed me to put a lump sum down on my loan my mortgage faster, which reduced the principal, which reduced the amount of interest I owe, but had to pay and that kept speeding up speeding up and next thing I know I owe only got one more payment two more three more payments of doing this three more monthly payments and one or two more my extra funds I'm putting on there and I'm not and it's paid off. And I did that a couple years before I actually retired. So I was able then to continue the same process and build up my savings for retirement. So it doesn't matter why and why you want to do it. You just have to get less debt on your budget. Yeah, get that debt out your budget which will free up the cash will free up your savings which will free up you be able to afford the things you want to do

Unknown: 24:49

and you'll be glad you did. So