Tip 3 – Cascading Your Payments
This month we are looking at four steps to get out of debt. As I’ve mentioned, if debt is not an issue in your life, please consider who you could help by sharing this blog.
Today we are talking about a strategy called cascading payments. But first, a reminder of where her debts currently sit. Remember that we have eliminated one already.
- $5,000 owed on line of credit 1 at 15.14%
- $1,530 owed to the government at 4.00%
- $3,451 owed on credit card 2 at 19.99%
- $10,000 owed on line of credit 2 at 9.95%
- $9,094 owed on credit card 3 at 19.99%
The point of this strategy is two-fold.
1 – Keep your payments steady until all the debt is gone.
If you face mounting debt in your life, the hardest part is breaking the cycle of going back into debt. That cycle is easy to fall into when you pay off one of your bills. Because the question is then asked: what am I going to do with my freed up cash flow? Many people will take that extra $100 or $200 and spend it. But it typically is spent on something that costs $300 or $500, so they put the rest of the purchase on another credit card and are right back in the same spot.
If getting out of debt is a priority for you, that freed up cash flow needs to keep going to pay off your debts.
Right now, my friend is paying just under $1,000/m to service these debts. When she pays off the first debt, I’ve told her that she needs to keep paying $1,000/m to service the remaining debts. That is the cascading part of this strategy – your payments cascade from one bill to the next.
2 – Being selective of what order you target the debt.
Now that she is committed to keeping her payments up, it’s time to order the debts strategically. Here is how she should pay her debts:
- $1,530 owed to the government at 4.00%
- $3,451 owed on credit card 2 at 19.99%
- $9,094 owed on credit card 3 at 19.99%
- $5,000 owed on line of credit 1 at 15.14%
- $10,000 owed on line of credit 2 at 9.95%
While the government debt should be targeted last from an interest rate point of view, it has a defined payment schedule and will be gone in June, so it stays at the top.
That will free up $310/m to start the cascading.
In July, she will add the $310/m to credit card 2’s payment. While the two credit cards have the same interest rate, choosing to target the smaller bill will reduce the number of payments she makes every month faster. Adding the $310/m will reduce the time to pay off that credit card from 30 months to just 13.
That will free up an additional $150/m. A total of $460/m is now cascading.
In Feb 2022, she will add the $460/m to credit card 3’s payments. That will eliminate that bill by June 2023, instead of Oct 2034.
That will free up an additional $162/m. A total of $622/m is now cascading.
For the lines of credit, we target line of credit 1 first with the added payments because of the higher interest rate.
Following the minimum payments on the account, she was scheduled to continue paying into 2034. Following this strategy, she will be debt-free by Feb 2024.
And if she finds better work and can put another $1,000/m toward the debt, she can be debt-free in June 2022.
Debt can be a terrifying thing if it is out of control. But when you put these ideas into practice, the end can be a lot closer than you ever imagined.
- Acknowledge it’s an issue and search out help.
- Reorganize your debt to a lower interest rate.
- Target a small debt to see the tangible results.
- Cascade your payments until all debt is gone.
If you are struggling with debt right now – you are more than welcome to reach out to me and I will work through the same principles with you that I used to help her.