How to Get Out of Debt Guide – Part 5 of 6

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The Rocky film series is a collection of great stories about an underdog battling through adversity and struggling to find success. Sometimes success wasn't even defined by a KO(knock-out) or victory. It was simply making it through each round and finishing the fight. As we step into the ring to battle our debt keep this in mind. We are fighting a battle that will be with us all of our lives. We need to form habits now and make one decision at a time. The decision to buy or save. To make another bill or to pay down an existing one. Each round will be filled with clever marketing tactics that will convince us we "need" this or that. Buyer beware.

For buy: waste time! For free: take. - Mrs. Fry

In order to get out of debt we need money. If you have no cash flow then it's going to be terribly difficult to pay down debt. One way to increase your income and cash flow is to get a second job. It will increase your income and leave less time for you to spend. It may not be an option for everyone. Another way to increase your income I mentioned in Part 4. It's by lowering your expenses. It may be difficult to do that. Take a look at the "want" list in Part 4. If you have no cash flow you will need to remove as many of these as possible. Remember this is only temporary until you get out of debt. After you are debt-free you can revisit these things on your "want" list and decide then if you are willing to spend your money that way.

How to Get Out of Debt - the KO Plan

We want to eliminate all of our bad debts (consumer debt), but we need to start with one at a time. Think of each debt as a boxing opponent. We would never want to step into the ring with someone like the undisputed heavyweight champion "Smokin'" Joe Frazier to start. (I mean when he was in his prime of course! R.I.P.) That would be suicide. We are going to start small. We'll take on the Featherweight contender first. In our case it's the smallest debt that you owe. Even if this debt has a lower interest rate we are still going to start with it. We are eliminating our debt and if we can cross one of our debtors off the list then we are off to a great start! So, take your lowest loan balance from the expense sheet on the PFS (Personal Financial Statement) that we filled out in Step 2. We will KO that debt first.

Step 1 - KO the Featherweight

  • Select lowest balance debt from Expense sheet
  • Pay minimum balance on all other debts
  • Use any extra money from cash flow to pay toward this debt
  • Temporarily put a hold on contributing to any savings or retirement account

Hopefully one of your debt balances is low so that you can experience victory early on. It may take a while. Something important to point out: You have to stop spending in order to pay down your debt. If you continue to spend then you will stay on the financial hamster wheel. It sounds easy. Spend less than you make but obviously it's not or you wouldn't be reading this. Keep your eyes on the big picture. What is your dream? More time? More money in the bank? Zero debt? How about a beach house? Write down what your perfect picture of life is and read it every day.

Credit Card #1 Payment: $100

In our example, we'll assume that you just paid $100 per month toward your lowest balance debt. Now that the debt is gone add that $100 to the new lowest balance debt payment. For example, let's say you just paid off a credit card (credit card #1). Now your next lowest balance debt is yet another credit card (credit card #2) that you are only paying the minimum $40 payment. Apply the $100 (that you were paying on credit card #1) to credit card #2 payment. So now your new credit card #2 payment will be $140. You are still paying the same amount monthly overall but you now have one bill less and are using the extra to power down your debt.

Step 2 - KO the Welterweight

  • Select the new lowest balance debt from Expense sheet
  • Pay minimum balance on all other debts
  • Use old payment from the first debt toward this debt

Old Credit Card #1 Payment: $100
New Credit Card #2 Payment: $40 + $100 = $140

Congratulations you are on to the welterweight! Continue this pattern until you reach your final debt. When you pay a debt off add that monthly payment to the next debt. Before long instead of making the minimum payments on several debts you will have combined all of those to form one huge payment. Let's say the next debt is a car loan for $300. After credit card #2 is paid off apply that $140 to the car payment.

Step 3 - KO the Middleweight

  • Select the new lowest balance debt from Expense sheet
  • Pay minimum balance on all other debts
  • Use old payment from the second debt toward this debt

Old Credit Card #2 Payment: $140
New Auto Loan Payment: $300 + $140 = $440

Let's take it one step further. Let's assume you have a 2nd mortgage on your house for an addition you built. The payment is $250 per month. Now that all of your other debt has been KO'd it's time to knock this debt out as well.

Step 4 - KO the Heavyweight

  • Select the new lowest balance debt from Expense sheet
  • Pay minimum balance on all other debts
  • Use old payment from the prior debt toward this debt

Old Auto Loan Payment: $440
New 2nd Mortgage Payment: $250 + $440 = $690

Do you see why this is called the KO plan? By applying an additional $440 you can power down the 2nd mortgage and cut the repayment time in half. If you started with more expenses than income these new found dollars will come in handy. Imagine having this final debt gone. Then you would have $690 extra each month!

Knocking out debt takes work. You will get jabbed and feel the pain of the blows but you will find victory in the end if you keep fighting each full round and don't give up. Successfully powering down your debt might not get you a trophy but you will learn the power of being debt-free. You will learn that true happiness doesn't come in a box or off a car lot or in any thing you can buy but rather from being content with what God has blessed you with.

Next Step: Finding Success

Previous Step: Devising an Action Plan

Craig Kelley

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Craig is the author of How to Get Out of Debt and an avid blogger. He strives to help people maximize their time and succeed financially as well as personally. He has been a leader in several start-up companies including Mokumax Virtual Domains & Servers, Inc. and currently HealthcareSupplyChain. Read more...

Trackbacks and Pingbacks:

  1. How to Get Out of Debt Guide – Part 4 of 6 -5 Minutes a Day - July 15, 2012

    […] Next Step: The KO Debt Plan […]

  2. Why You Need an Emergency Fund -5 Minutes a Day - August 1, 2012

    […] fund ASAP. Make that your priority. Once the emergency fund is back then you can get back to KOing your debt or […]

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