THERE exists a fabulous, little known strategy to pay off all your loans faster than you ever imagined! Sadly, there are factions within the financial sector that don’t want you to know about it.
If you’ve reached the stage of life where you woefully tell yourself, “I will never get out of debt,” then please let me teach you what I have come to call the ‘Small to Big’ strategy for exterminating ALL your debts.
It took me several years of ineffectually fighting my life’s persistent debt load before I learnt about this strategy. Later, I wrote a modestly well-received book entitled Liberty! From Debt-Slave to Money Master, explaining it in depth and at length.
More recently, my column here (just two weeks ago) laid the groundwork to understand this strategy, so you might wish to read (or re-read) it along with other related past columns here: www.nst.com.my/authors/rajen-devadason
To put this powerful, liberating strategy in place, here is a recap and expansion of the last few instructions from a longer series of steps outlined in my last column:
1. List ALL your loans in a notebook or Excel spreadsheet;
2. Then, for each such liability, write its description, the amount you still owe, its APR (annualised percentage rate), your monthly payment due date, and your minimum monthly repayment; and
3. Eliminate or at least minimise any future borrowings going forward because none of us can clamber out of our personal pits of debt if we simultaneously keep digging ourselves into ever deeper holes! Trust me, I know this first hand.
Our “Small to Big” strategy first involves setting up a challenging but practical budget to extract a little extra free cash flow each month to selectively add to our existing minimum debt repayments on our outstanding liabilities.
Its technical elements are simple. More importantly, though, this simple strategy has helped millions worldwide (out of the 7.7 billion humans alive today) to migrate from a state of hopeless despair and fear for tomorrow to hopeful anticipation of a brighter, “lighter” future.
SMALL TO BIG RATIO
Today let’s learn about Adam:
He is single, 32 years old, and earns a monthly net income of RM5,000.
His average monthly expenses come to RM4,750.
Adam has never budgeted before; so, once he starts telling his money where to go instead of wondering where it went, he will be able to bring his monthly expenses down by, let’s say, RM200 with a little sacrifice and care on his part.
Doing so will reduce his total monthly expenses, EXCLUDING debt repayments, from RM2,330 to RM2,130.
As for his debt repayments, here is the CURRENT breakdown of Adam’s RM2,420 for six loan payments, out of his total of seven liabilities:
a. RM40,000 on a five-year loan on a small car he has just bought with a RM770 monthly repayment;
b. RM230,500 now owing on a 30-year flexi home mortgage on the apartment he lives in. The mortgage has 28 more years to run. Adam’s minimum required monthly repayment is RM1,200;
c. RM500 borrowed from his girlfriend Eve last Christmas when he was tight for cash. It carries no interest, but Adam hasn’t started repaying her yet;
d. RM10,000 still owed to his favourite uncle, Moses. Two years ago, when Adam was short of cash during the final phase of buying his modest apartment from the secondary market, he borrowed RM12,400 from kind Uncle Moses. Adam has repaid RM100 a month over the last two years. His unit is a 40-minute MRT ride from his office in the heart of KL;
e. RM2,000 is the outstanding balance on his only Visa credit card;
f. RM4,000 on a MasterCard credit card;
g. RM1,000 on a different MasterCard.
In America, this “Small to Big” debt repayment strategy is sometimes called the “Debt Snowball”. In his outstanding book The Total MONEY Makeover, which I highly recommend, author Dave Ramsey explains why eradicating debt with this potent strategy — regardless of what you choose to call it — is vital for financial health:
“... I have seen how many people make huge strides toward being a millionaire in the short time after they get rid of their payments. If you didn’t have a car payment, a student loan, credit cards out of your ears, medical debt, or even a mortgage, you could become wealthy very quickly.”
So, with that commendable, lofty goal in mind, Adam should rearrange all his debts from smallest to largest. Here’s what it would look like:
1. (c) RM500 - Eve
2. (g) RM1,000. - MasterCard 2
3. (e) RM2,000 - Visa
4. (f) RM4,000 - MasterCard 1
5. (d) RM10,000 - Uncle Moses
6. (a) RM40,000 - Car loan
7. (b) RM230,500 - Mortgage
In next week’s column, I will cover the ensuing, more advanced steps of this powerful strategy.
Till then, I urge you to use Adam’s example as a template for you to FIRST list ALL your personal debts and then to RELIST all of them from SMALLEST to LARGEST.
FYI: Do you remember the RM200 extra from his monthly cash flow that I said Adam freed up through budgeting? We’ll utilise that next week.
For now, I hope exuberance bubbles up in your heart at the pleasing prospect of FINALLY getting rid of all your debts. Excited?
You should be.
© 2020 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason