Do you have short term or long term debt? Hoping to settle it when you get your next big bonus or when you can scrap enough money to pay a minimum or when the lender gives you unbearable pressure ?

There is a simple technique to dissolve your debt. It requires minimum discipline from your part and no need to earn higher than your current earnings. All that is required is that you follow some simple steps and soon (as if magically:-) ) you will be debt free. Listen. The time it takes you to become debt free will depends on your level of debt.

Now, let’s get started with the five step process to killing your debt.

STEP 1: Calculate Disposable Income

Your monthly disposable income is the total cash you get in your hand (or bank account) every month after all your deductions and contributions. This number is the pure cash you have total access to and that you can spend 100% with no worries. Next; calculate your annual disposable income.

E.g.: Your disposable income is $5000 per month. So your annual disposable income is $60,000 ($5000 x 12).

STEP 2: Calculate Debt to Disposable Income (DDI) Ratio

Calculate your debt to disposable income (DDI) ratio. Take stock of all the money you owe. Include all your credit card, personal loan and money you owe to friends or people. Do not include your mortgage.

E.g.: You have a credit card debt of $5000
You have a personal loan from bank of $5000
You owe $2000 to a friend

Your total debt $12,000

Your annual disposable income is = $60,000 ( as calculated in Step 1)

Debt-to-Disposable Income (DDI) ratio = outstanding debt / annual disposable  income  = $12,000 / $60,000 = 0.20 = 20%

You have DDI ratio of 20% which not that bad. If you have more than 40% that is bad. However, even though if you have more than 40% DDI there’s no need to panic as you can still come out of debt.

STEP 3: Prioritize your Killer Debts

Prioritize your debt settlement order in terms of highest interest debt to lowest interest debt. In this case your credit card will have higher interest rate than a loan from your friend.

1. Credit Card

2. Personal Loan from bank

3. Loan from Friend

You need to start settling from the highest interest loan to lowest interest loans.

Note: DO NOT have credit card debt. Where possible settle credit card loans using fund transfer or another personal loan from the bank as early as possible. Your goal is to always look for debt with minimum possible interest rate.

STEP 4: Setup a Debt Killer Account

Step up a new savings account and call it a debt killer account. Do not use an existing account. Setup a new savings account just for killing debt. This makes it easier for you to manage compared to having a common account. The advantages will be evident once you start using a separate account for debt killing purposes.

STEP 5: Automatic Debt Settlement

Setup a automatic deduction of 10% of your disposable income and transfer it to your debt killer account the same day you receive your income. From this debt killer account again setup an automated process to settle your highest interest loan. Make the debt settlement process as automated as possible. It is much more likely to happen if automated than if executed manually. When you try manually you will tend to rationalize current month expenses and will postpone your debt settlement to the next month, which of course never happens.

So avoid manual processes and setup fully automated debt killing process. If you are not able to setup an automated process for some reason, seek the help of your spouse, family member or trusted friend and give them the authority to transfer 10% from your bank account to the debt killer account and ask them to settle your debt from your debt killer account.

Also make it a habit to deposit your unexpected income or money like tax rebate or refund to this debt killer account. Track your DDI ratio every month using Steps 1 and 2.

In no time you will find that your DDI is falling and it will give you that added reason to kill your debt faster.

It will never work for me

I know you already thinking to yourself this will never work for me. Because I don’t have money even to meet my rent and basic needs. How do I find the extra 10%? Forget it.

It may sound strange, but the truth is this. When you take out 10% off your disposable income, magically you are able to live with your remaining 90%.  You can try for three months as a trial basis. For sure you will be puzzled at how you are able to lead a normal life without that 10%.

Somehow you will have less expenses and your will subconsciously adjust with what you have got. You will never feel you are sacrificing your lifestyle or controlling your expenses. It works so beautifully that you will never notice the missing 10% of your disposable income. While your 10% will be dutifully killing your bad debt you can still enjoy life.

If you happen to leave this world in an unexpected moment, I bet you don’t want to leave as a debtor. Because you will not have another chance to settle you debt and you will end up leaving the ones you’ve left behind struggling to settle your unexpected debt.

Act today.

Cheers – Jag.

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