Step 3 - Use Your Cash Flow Engine
Module 1: Apply Cash Flow to Eliminate Debt
Now we’ve developed a cash flow engine and we have positive money left at the end of the month, we need to start applying that cash flow and using the engine to eliminate your debt and then move to acquire income producing assets for your family.
Let’s take as our first example a triangle here of a 4 credit cards debt balances where they add up to $23,000 of debt. In this example remember under Step 2 we said 3% of the current balance we need to fix and as they reduce still keep them all fixed at 3% of the 23,000 which would in the example be $690 toward our debt. We take the $690 and we pay the monthly minimum payments on all of these accounts except the smallest balance. The larger $10,000 balance account would be $200; the $7,000 balance would be $140; The $4,000 would be $80 dollars but the smallest balance we are going to pay all the money left over from the $690 which would be $270.
By doing this the $270 is going to clear this debt off very quickly if you assume an average credit card interest rate it would be paid off in about 10 months. Now that might seem like a long time but remember that we can clear ALL the debt in five years so really that’s not so long. The reason we picked the smaller balance regardless of the interest rate is that we need the encouragement to give us the acceleration and the passion to get rid of some larger debts. In any event, that is going to very quickly be paid off.
Once that debt is paid off you can see in the next slide that we no longer have to make the $270 and now we link that with the $80 on the $4000 balance. Now we are paying $350 on the $4000 balance. Once again we hold minimum payments on other debts at the same amounts. The minimum payments on the other two accounts are actually going down slightly but for our purposes just hold the amount firm. We have to train ourselves that the monthly minimum payment amount has NO relationship to the correct amount to service that balance. It is just there to make the credit card companies rich. The $350 payment on the $4000 balance means that in about a year it is totally wiped out.
If you can remember the cash flow lifestyle development of a concept with moving from the attitude into the action the next step was that over time it becomes a habit instead of a chore. The debt elimination can be fun at this point and you will actually start to develop additional monies that you can put into the plan and actually accelerate your way out even faster than you might imagine.
Now we add the $350 to the $140 were paying on the $7000 balance to get $490 to pay towards the $7000 balance. We apply the $490 every month and because this is a little bit bigger balance it may take 15 or 16 months to pay off. The key is that you must apply that pressure by paying consistantly over time and continue with the $490 until the debt is eradicated. Then you take the $490 added with the $200 and have 690 to apply towards the $10,000 balance.
With the $690 monthly going towards the $10,000 balance you will be done you are debt free. That’s a good feeling and I remember the day that I became debt-free. It was really nice feeling and so nice that I want to never go back in debt. Now that you’re completely debt-free and you still have a cash flow engine and remember we still have $690 a month of cash flow engine is available to us.
If you took that $690 per month and you were to have that in an investment at 8% interest it would be the equivalent to having $103,500 invested. The cash flow per month is worth $103,000 as as an income producint asset so that’s really quite a cash flow. You can start transitioning that cash flow into equivalent income producing assets.