Step 2 - Develop a Cash Flow Engine
Module 4: Proper Debt Service Amount
So, let’s take a look at the unsecured debt and the appropriate amount that we should set aside to properly service the unsecured debt. The unsecured debt payment on credit cards is pretty much a very deceptive, fleeting amount of money, because we’ve been trained by the credit card companies to pay the minimum payment amount. On your credit card statement, you will see every month a minimum payment amount. It will be in large type, a much larger font. You’ll have to squint if you want to see what the balance is, or if you want to see exactly the other terms of the agreement. But in big bold print is this minimum payment that is due.
What this minimum payment is, is the amount of money that when paid to the credit card company every month, you will be a financial slave for the rest of your life. It’s pretty serious, and if it wasn’t for the legal power of credit card companies they’d probably be going to jail or be locked up for fraud. Because, this is not part of what it would take to properly service that level of debt. It’s only the amount of the necessary to keep credit card companies rich for the rest of your life. You have to totally ignore the monthly minimum payment. That has no relationship to servicing your balance.
Since it’s a percentage of the balance, as the balance comes down the minimum monthly payment comes down. So basically, it’s a trick. You really can’t let it be the percentage of the balance or you’ll never pay it off. You need to take your permanent fixed amount of 3% of the current balance, assuming there’s no new purchase. This is a fixed amount. This is not 3% that keeps getting smaller as the debt gets smaller. You set it at one particular point in time. It’s 3%. That’s the number and you stick with that number. That is the only way you’re going to be able to properly service your unsecured debt.
Now, if the account is still active for purchases you need to pay over the 3% fixed number. We don’t recommend that you continue purchases on the accounts. We recommend that you go directly on a cash basis. If keep the account active for current purchases, you need to pay 3% of that fixed amount that we decided, plus 100% of all purchases for that month. Otherwise you’re getting right back onto the old monthly minimum payment trap the credit card companies love so much. That’s pretty much a good guideline, that 3%. So whether or not the account is open or closed,— 3%, and Fix it. Don’t just come back and slide six-months from now and say “Oh, here’s the new balance! Let’s just pay 3% of this!” Because, you just keep basically pushing your debt-free date to the right. You just keep pushing and pushing it to the right, and it never comes.