Thanks to some circumstances where somebody knew somebody who knew somebody, I found myself tonight at a seminar where John Cummuta was speaking. He’s the guy who you may have heard on the radio hawking a system called Transforming Your Debt into Wealth. From him, I learned how to pay off a mortgage in five years.
Hopefully I won’t get into too much trouble by presenting the simplified version of his plan.The secret of credit is that creditors will not extend you more credit than you can conceivably pay off in a fairly short length of time (like, less than a decade). The secret is to make that work for you, rather than for them.
His system is simple enough that you can plug it into an Excel worksheet. Mine has three equations in it. Here’s what you do.
Take 10 percent of your monthly income and use it to pay down debt. Pick the debt you can pay off the fastest. Forget interest. Pay the minimum monthly payment on all of your debts except the one you can pay the fastest. Add that 10 percent of your monthly income to the debt you’re working on. So if it’s a credit card balance with a minimum payment of $22, and you make $2,000 a month, you pay $222 towards that credit card.
Then, when that credit card balance is paid off, you take the debt you can pay off second, add its minimum monthly payment to that $222. Keep cascading the payments until you’ve paid everything off.
Using that formula, I can have my car paid off in a year and two months, and my house paid off in five years and two months after that.
The more money you can plow into paying off debts, the faster it goes.
He said the interest rates are pretty much irrelevant because you are paying the debts off so quickly. So it doesn’t make sense to refinance or consolidate debts or anything like that because you won’t recoup the closing costs.
The formula is a bit crude because it doesn’t take into effect the minimum monthly payments you are making, nor the accumulated interest on the on which debts you’re making minimal progress. But he said those numbers pretty much end up in a wash. Following this crude formula, you’ll be within a couple of months or two.
Also, he suggested putting off investments until you have your debt eliminated. The exception is 401(K) or similar plans where employers match your contributions. The logic is that the compound interest on your debts will almost always be larger than the compound interest your investments can earn.
However, he did not say you should empty your bank accounts to pay debt. If you have enough money in the bank to be able to take half of it and pay your smallest debt, go ahead and do it, but otherwise leave your existing bank accounts and investments alone, suspend contributing to them (or do the minimum), and then, when you have the debt paid off, you can afford to contribute to them very aggressively. Remember, at the end of the plan, you no longer have those monthly house and car payments to make.
Someone who makes $40,000 a year and works 40 years will make $1.6 million over the course of that career. The idea is to pay as little of it as possible in interest, so that money is working for you instead of your creditors.
It seems to me that debt ought to be like college. It ought to be something we do for a few years in order to get something we need, but after a few years, it’s over. And if we have to make a few sacrifices along the way, just like we did for college, we ought to do them.
Update: It worked. Thanks to finding better paying jobs and applying that, we were able to pay the mortgage off ahead of schedule.