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Monday, December 10, 2007

"The Automatic Millionaire" (Chapter Seven)

In this, the shortest "action" chapter of David Bach's book, the author simply gives some tips on how to use your new automatic system to get out of debt and then stay that way. Getting and/or staying out of debt is a major step in becoming a millionaire. As you know, if you don't have to pay Mastercard, Visa, and other cards, you have freed up money each month, and you are not paying interest.

How do I get out of debt? Bach offers five steps, but, before doing that, he reminds us all of how bad credit card debt really is. If you are like the typical American family, you have $8,400 in credit card debt (and only credit card debt!). If you pay just the minimum and never charge another thing, you will pay over $20,000, and you will be paying it off for over 30 years! (pages 195-196)

With those things, in mind, how do I pay off those cards quickly? Here are Bach's five steps:

1. Stop Digging. It's pretty simple when you think about it. If you don't have credit cards, you won't build up debt on them! Dave Ramsey recommends cutting up your cards (which I did a long time ago). Bach never makes a statement quite that bold, but he does recommend that you never go shopping with a credit card in your pocket.

2. Renegotiate the Interest on Your Debt. A lot of people don't even realize you can do this. Check the fine print to find out how much interest you are really paying, then simply call the company and ask for a lower rate. If they act like they won't do it, tell them you will be closing the account and moving (transferring) the money elsewhere. If they won't go lower, ask to speak to a supervisor. If that person won't go lower, transfer the money. Another way to accomplish this, is to move all your debt to one card (or account, since, hopefully you'll get rid of the actual card). Many companies will take a higher amount and give you a lower rate.

3. Pay for the Past; Pay for the Future. Here is where I disagree with Bach. He says that you should continue to put money into retirement and pay off the debt. He says that you will see progress in both areas and that will be a great motivating factor. I disagree. I would rather get rid of the debt as quickly as I possibly can. Either way works, as long as you stay focused.

4. DOLP Your Debt Our of Existence. "DOLP" stands for "Dead on Last Payment." This is basically the same idea as Ramsey's Debt Snowball, but is a much more math-intensive way of doing it. Here are the steps (quoted from page 206):

  • Make a list of the current outstanding balances on each of your credit card accounts.

  • Divide each balance by the minimum payments that particular card company wants from you. The result is that account's DOLP number. For example, say your outstanding Visa balance is $500 and the minimum payment is $50. Dividing the total debt ($500) by the minimum payment ($50) gives you a DOLP number of 10.

  • Once you've figured out the DOLP number for each account, rank them in reverse order, putting the account with the lowest DOLP number first, the one with the second lowest number second, and so on. [Page 206 has a table that shows you small example; using three credit/charge cards.]

5. Now Make It Automatic! You knew this was coming, didn't you? Automatically pay your debts from your paycheck (or checking account) until the debt is gone. When it is gone, call that company and close the account completely, then automatically pay off the next debt, paying all you can each month to get it gone (including the money you were sending into the first debt).


Now, you are debt free, your house is being paid off quickly and you have money going into retirement. There is still one more step, though.

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