Generally, when you carry a balance on a credit card, you should try to pay it down quickly by sending in more than the minimum required payment, right?
Consider this typical client: Dual income over $100k. Nice newly constructed home in NH. Drive BMWs. Husband works a lot to support a comfortable, but not extravagant lifestyle. Wife is in law school and works part time. Otherwise, they are the average American couple, just without kids in this case.
Yet their concern is that they don’t seem to get ahead. They don’t feel like they have a lot left over each month.
Like the typical family, they also have their share of debt. Some details…
Mortgage balance - $332k
Consumer debt (credit cards / auto loans) - $42k
Interest rates on credit cards – Range from 0% to 17.9%
Payments on debt - $4,200
Required payments on debt - $3,500
Thus, they send in an extra $700 per month on the credit cards.
Doing so, it would take 6.5 years to pay off the consumer debt. This is assuming that as they pay off each loan, that payment would go towards spending. Rarely people can truly ‘save’ that money because it gets spent on something!
What if they only sent in the minimum payments, but used an optimized payoff strategy? The number will shock you…
Time to pay off non-mortgage debt – 4 years, 9 months.
That’s almost two years earlier! And we’re talking about dropping the payments down to the minimum required amount.
Conclusion – They can pay $700 less per month and still pay off their debt faster!
How’s that possible? Come on….this can’t be real!
Well, these figures are from a real client. And this is real, using a strategy called debt stacking.
But here’s the important point – what everyone thinks is a good idea (send in extra payments on the credit cards) isn’t as good as it seems.
No I didn’t take anything out of their lifestyle. I didn’t tell them to stop going out to dinner. No canceling vacation plans. And no need to clip extra coupons
All I looked at was how they paid their debt. And by following the ‘rule of thumb’ that most people think they know, they would end up paying more in interest for longer, and keeping that feeling that they are just getting by each month.
How would you feel if you ‘found’ an extra $700 per month?
Answer to last week’s trivia question: B - 37%
This week’s trivia question: According to Congressional research reports, people who are at least 65 yrs old (retired or not) receive what percentage of their income from Social Security? Is it?
A – 95%
B – 72%
C – 51%
D – 39%
