Debt Stacking - How To Manage Money
Do you have a plan in attempting to eliminate your debt
? Are you tired of making the minimum payments on each outstanding balance and don't seem to make any progress?I want to go through what debt stack is and how to manage money and get rid your debt as quickly and reasonably as possible. Something that is more interesting is you can follow the debt stacking formula to assist in making the retirement you have always dreamed of!
What is Debt Stacking?
I have discussed this in one of my previous post but perhaps this may be worth another discussion. Debt stacking is a simple principle of eliminating all debts in a pyramid type formula. It works and it is actually really easy and you can get rid of your debt 2 to 3 times more quickly then you may have thought possible.
STEP BY STEP PROCESS:
STEP 1: Make a list of all of your current debt. Put each amount in order from the lowest amount to the largest.
STEP 2: Establish an emergency fund in a savings account. The lowest amount you should have is $1,000. You just never know if or when you may need it.
STEP 3: Be sure to make the minimum payments every single month that is required on all of your debt until the first one is paid off.
NOTE: If you typically pay extra on one or more of your balances each month, apply that extra amount to first item (of the lowest balance) on your list. (ie if you pay $200 extra each month on item number 3 switch that amount, regardless of interest to the lowest balance)
STEP 4: Once the lowest debt has been paid, apply that minimum monthly payment from the first debt and use it against the next lowest balance (the second one) on the list. This will help speed up the amount of time it will take to pay off the second balance.
STEP 5: Repeat that same process to the next debt or until all have been eliminated. Keep in mind you are not spending any more money and it will accelerate the process.
REMEMBER: For this to work effectively you must not create any new debt.
Here is a typical example:
TYPE: AMOUNT: REQUIRED MONTHLY INTEREST RATE:
PAYMENT:
Credit Card $7,500 $150 16%
Car Loan $10,800 $350 8.5%
Student Loan $14,600 $365 7.25%
Mortgage $139,000 $940 7%
TOTALS $171,900 $1,805 -----
If you only made the minimum required payments:
It would take 32 years to be completely out of debt.
In those 32 years you would have paid $205,485 in INTEREST for a total of $377,385.
If you apply the Debt Stacking Formula:
It would take just 12 years to pay off that same debt.
In those 12 years you would have paid just $86,343 in interest for a total of $205,485.
This might seem too good to be true but this is a relatively simple process that works. You are not making any changes to your monthly payments, just a different approach. Each persons situation is different but debt stacking can work for anyone.
How Debt Stacking would help with retirement:
When all of your debt has been eliminated, take the same total minimum required monthly payment of $1,805 and invest it. Do that each month for the next 20 years. You would have been paying that amount for another 20 years anyway. If its invested at 8% you will have $1,179,533 in 20 years. Nothing in your lifestyle has changed.
Basically debt stacking will dramatically reduce the amount of time it will take to pay off your debt and it will also reduce the total amount of interest you will pay AND it will help create the nest egg you have always wanted. That sounds pretty great doesn't it?
When it comes to paying off debt you don't always see results. It's difficult to stay focused and keep up hope when those large balances don't seem to go away until the final few years. What you need to do is pay as little interest as possible so you will have more of your money in your bank account for the future. I hope this post helped you understand debt stack and showed you a little more about how to manage money.
Until next time,
Brandon
by: Brandon Schmid
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