As I mentioned, I have tried to reduce my debts in the past, but usually what ends up happening is that I punish myself by dumping all I can towards debt payments. This leaves me with nothing for myself or any unexpected costs that may come up.
Also, I’ve always been conflicted due to reading various books* and theories on the subject, on whether it makes sense to have “savings” at a considerably low interest rate, while having debts at a considerably higher interest rate.
Basically, I needed advice and I needed a plan.
During the past two days I read a book by John Fuhrman titled, “The Credit Diet”. In it he proposes a way of attacking debt and building for your financial future by setting up multiple bank accounts and utilizing automatic payments to these accounts. At first, this may seem like a dumb idea since if you have no money what the hell does it matter where that ‘no money’ is or how many places you ‘can’t put it’. But Mr. Fuhrman addresses this issue by saying that if you keep honest with yourself about the purpose for each account and try to resist tapping into them they can slowly, but surely, lead to your ‘financial freedom’.
Like I said, I’ve read many personal finance books including multiple books by Suzy Orman,
Robert Kiyosaki, and “The Automatic Millionaire”.
However, as they were able to provide some good advice and a few practical theries they never really set out a solid plan like “The Credit Diet” has.
The multiple accounts plan consists of setting up 6 separate bank accounts. One checking or “cash flow” account – which all of your money will go into initially. And 5 separate buckets (saving accounts) to build your future upon. The five buckets are:
- Permanent Wealth Account
- Only Fun Account
- Future Growth Account
- Income Security Account
- Debt Elimination Account
The idea is to live off of 90% of your monthly take-home pay and then distribute the leftover 10% between these 5 accounts in the following way (the allocations vary depending, of course, on what you feel you can handle – I, however, will be going straight from the formula described in the book.):
- Permanent Wealth Account – 10%
- Only Fun Account – 20%
- Future Growth Account – 10%
- Income Security Account – 10%
- Debt Elimination Account – 50%
While these contributions are made, you continue to pay the minimum on your debts. In connection with these you arrange your debts in a way where you can snowball your payments – a great explanation of this and a similar way to how I will be going about it can be found on another great personal finance blog that I have just started reading called “The Simple Dollar”.
Then you choose a time period to unload your Debt Elimination account on whatever bill you’ve decided to target first. In the book they suggest unloading this account every 90 days – so, that is what I’ll shoot for as well.
I’ve customized the strategy slightly because I’m not going to have all of my accounts at one bank – this is due to better interest rates and if I don’t need the money or am not supposed to touch it, I may as well not have the temptation. Also, as some of my bill due dates are spread throughout the month, my deposits into these 5 accounts will be divided in half in order to not kill my first or second paycheck.
My allocations for the five accounts are as follows:
- Permanent Wealth Account – $20.70
- Only Fun Account – $41.40
- Future Growth Account – $20.70
- Income Security Account – $20.70
- Debt Elimination Account – $103.50
Now – yes – this does look like a lot of money to “put aside” considering I believe myself to live paycheck-to-paycheck. But this fear is also addressed in the book and like anything uncomfortable, I apparently will get used to it sooner rather than later.
The “snowball structure” that I’ve set-up is:
American Express – $2000.00 (4.99%)**
MBNA – $13,190.29 (22.44%)
Credit Union Credit Card – $9,423.67 (16.50%)
Car Loan – about $5,000 (5.45%)
I’ll keep you posted.
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* As part of my new plan/way of life – I’ve sworn off buying books from Barnes & Noble, Borders, etc. Instead I’ve opened an account at my local library – where my first ‘rental’ was “The Credit Diet”.
** I know, I know…almost every book you read will tell you that if you have a rate beneath 5% that you should leave that for one of the last you pay off because it’s not hurting you as much as the higher rate debts. But there are two things which put my AMEX card up at the very top.
- Lowest Balance – it will be a moral/emotional victory.
- Large Contribution to the Debt Elimination Account – once this no longer becomes a monthly expense I will be able to re-direct the minimum payment to my Elimination fund helping me accelerate my climb out of debt faster…I hope.
