Slaying the Debt Dragon
Want to get ahead? Do the math ERIC GEMELLI’‘s way. This MARKET ANALYST has a proven system that works for young people and Boomers too
Your Visa bill is how much? Sit down, take some aspirin to thin your blood and take off your shoes so you don't have a heart attack. There's hope and you might even want to live through this.
After a summer of hosting parties, buying new furniture so the house looks "right" for parties and entertaining, plus your natural tendency to give generously last Christmas, the debt debt can really mount. Fortunately there is a somewhat painless solution known as debt stacking that can eliminate debt for only $50 per month.
Let's say Bob Buyer has a $50 monthly payment on his computer. He also has a $100 payment on the big-screen TV, made, oddly enough, by a Japanese company, just like his computer and car—but that’s another economic discussion altogether. He bought the flat screen in preparation for last year's Super Bowl party and has a $200 payment on the leather couch to impress the people at said party, plus a $400 car payment on his car. Like the majority of Americans, he's swimming in credit card debt. OK, drowning in debt.
The ease of debt stacking is what makes it so appealing. Bob tackles his smallest bill first, making the regular $50 payment plus doubling that with another $50 for a total of $100 a month. By doing this he will literally cut his payment time in half. When the computer is paid off, he will take the extra $100 in his budget (extra because he’s retired the computer debt) and add that to his big-screen TV payment, thereby cutting payback time in half again. From here on out, he only needs several months to finish off the couch debt, as he has gained an extra $200 each month to add to the couch payments because he’s paid off the computer and TV already.
With the extra $200 available per month, he should tackle ... no, not the car, but the credit cards. If the car is financed at 1.9 percent and the credit cards are draining his bank account by 16 percent (some people pay more), he should add the extra $200 in his budget (he’s paid off the computer, TV and sofa) to his monthly credit card payment and eliminate that onerous burden.
There are a couple of drawbacks to this stacking process, though. First, it can take several years. But remember, getting buried in so much debt took a couple years too. Also, to make this work, you have to put new large purchases on hold during this time. The good news is you're going to feel rich at the end. You'll actually have $600 extra available each month plus whatever was going to feed the credit card dragon.
Now you have some interesting options. Your first goal should be to establish an emergency fund equal to three months' expenses. Strive for six months' expenses if you're a United Airlines employee and prone to layoffs or strikes.
Once you have an adequate emergency fund, you can start planning ahead for future purchases such as next Christmas, replacing a vehicle, or a vacation. Eventually you'll have enough free cash flow to invest or pay off the house early, or both.
Author Eric Gemelli founded Cornerstone Financial Services LLC in 1997 and as the managing member has worked in mortgages, life and health insurance, raised venture capital, and trading commodities averaging 30% a month doing so. He offers market forecasting services, and is “sure enough of [his] ability that 80% of [his] fee is based on performance.”
