Three ways to eliminate debt• Debt Snowball Method

– Behavioral approach intended to keep you motivated. It is not optimal for minimizing the total amount you repay though because it is based on payment size and does not take into account interest rates.

• Debt Stacking– Start with the highest interest rate and pay off your debts in that order. It is a great

reference point to have as it clearly shows the cost of incorporating behavioral approaches when developing a debt pay off strategy.

• DOLP Method– Goal is to help you decrease the amount of creditors you owe. Easing the psychological

burdens associated with having multiple loans and reducing the risk of missing a payment and the associated negatives such as late fees.

.TIP:You can implement and update all of the methods discussed in this presentation using a spreadsheet along with a variety of resources available via a quick google search. Or

automate the process using the calculator available at DebtMD.com options.

Debt snowball method• Identify lowest balance debt • Pay as much as possible on lowest balance debt• Make minimum payment on all other debts• When payment of lowest balance debt is complete use freed up funds to

begin paying off second lowest balance debt while continuing minimum payments on other debts

• Continue devoting extra money freed up from paying off additional debts to higher balance debts until debt payment is complete.

TIP: The Debt Snowball Method focuses on small victories sustain

commitment towards the goal of paying off debtptions.

Debt stacking• Identify highest interest rate debt • Pay as much as possible on highest interest rate debt• Make minimum payment on all other debts• When payment of highest interest rate debt is complete use freed up

funds to begin paying off second highest interest rate debt while continuing minimum payments on other debts

• Continue devoting extra money freed up from paying off additional debts to lower interest debts until debt payment is complete.

TIP: Debt Stacking focuses on maximizing the amount of money devoted

to repaying principal to get you out of debt spending the minimal amount possible.

ptions.

DOLP Method• Stands for Done on Last Payment• Developed by author David Bach • Identify debt you can pay off the fastest with DOLP number

– To calculate the DOLP number divide outstanding balance by minimum payment– The lower the DOLP number the higher the ranking for debt repayment

• Repay account with lowest DOLP number first• Make minimum payment on all other debts• When payment of lowest DOLP debt is complete use freed up funds to begin

paying off second lowest DOLP debt while continuing minimum payments on other debts

• Continue devoting extra money freed up from paying off additional debts to lowest DOLP ranked debt until debt payment is complete.

TIP: DOLP focuses on minimizing the risks inherent in having a lot of

creditors. Because late fees and other penalties are typically similar no matter the size of the balance.

Focus on dollars• People have a strong tendency to calculate the future linearly instead of

exponentially. • People default to linear thinking because it’s much easier to think linearly. • Since interest compounds exponentially people don’t intuitively understand how

much they’ll end up paying when taking on loans. • There is a natural tendency to underestimate the interest rate of a loan when

provided with its other terms. • This is why car dealers try to shift attention to the monthly payment amount.• People naturally underestimate the total repayment amount because of the

tendency to underestimate the interest rate. • Use decision aids to help focus your attention on the total repayment amount to

combat this natural tendency to underestimate installment borrowing costs.

FACT:Starting with a mere penny and doubling it every day for 31 days,

you end up with $21,474,836.48.:

How minimum payments work

Three key components to the amount you'll give to credit card companies when making a purchase you can’t pay off immediately:

1. How much you owe. 2. Your interest rate. 3. How long you stay in debt based on the minimum

payment you make.

TIP:Credit Card companies lure people into maintaining balances with attractive initial

terms. Hoping they won’t pay their balance in full during this introductory period. So they will be able to begin earning interest from the balance once these attractive

initial terms expire.

A Good Rule of Thumb for Using Credit

• Will the purchase be paid off before or after it is used. • Items used for years can be purchased with credit

– Cars – Houses

• Items used immediately should be paid for with cash – Restaurant Meals– Vacations– Weddings

FACT:Fundamentally borrowing is a choice to consume something now instead

of in thefuture. So taking on debt to finance a long lived asset, presuming the

payment taken on is affordable, can be a worthy investment.

Debt Coverage Ratio• Ratio between the income available now versus the amount

already committed to repaying for past purchases

Net (After-Tax) Income / Debt Expenses • To normalize your calculation you may want to exclude

housing costs

Net (After-Tax) Income – (mortgage or rent) / Non-mortgage Debt Expenses

• A ratio under 5 signals potential trouble while a ratio under 3 should be considered unsustainable.

TOOL:To help you get started I’ve set up a google doc template for

tracking the debt coverage ratio.

• Amount of money devoted on a monthly basis to achieving financial goals.

Total of Minimum Debt Payments + Incremental Contribution • Powerful motivator to secure freedom from financial worry. • Savings on interest charges compound over time to

geometrically build wealth.

Lifetime Investment Figure

TIPConstructing a Lifetime Investment Figure as a tool to

eliminate debt builds a powerful habit creating the mindset needed to achieve your financial goals.

If you are interested in learning more about the Snowball Effect please sign up for the DebtMD newsletter to receive a free copy of the full report.

The Snowball Effect

TIP:Life is like a snowball. The important thing is finding wet snow and a really

long hill. Warren Buffet

Steve is a CFA® Charterholder and founder of DebtMD.com. A site devoted to helping people discern insights into their finances. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

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