The Debt Cascade Method

A New Debt Repayment Method

You have heard of the debt snowball method of payment accelerating your debt repayment by focusing extra payments on your smallest debt accounts. You may even have heard about the debt avalanche that advises you to focus extra payments on your debt with the highest annual interest rate. Money Fit by DRS is identifying and clarifying new ways to pay off debts to better fit your household situation and financial goals. One of these methods is the Debt Cascade repayment plan.

Here are the steps to our Debt Cascade method:

  • Write down what your minimum monthly payments are for all your current debts.

  • Do not use your credit cards, store cards or other lines of credit again, at least until they are paid off in full and you are ready to use them prudently.

  • As your credit cards, store cards, and other lines of credit begin asking you for lower minimum payments each month, continue to send the amount you wrote down in the first step.

  • Become debt free in just three or four years rather than fifteen to twenty-five years at standard minimum monthly payments.

Who Is the Debt Cascade for?

This debt repayment method works best for any individual or household who cannot find any way of reducing their current expenses in order to free up cash that can be used to accelerate their debt repayment.

 
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If you are at a point where you can only afford to make your minimum payments and not a dollar more, then the Debt Cascade is for you. Without requiring you to send any additional funds than what you are already sending, the Debt Cascade method will have you out of debt in one-quarter the time of standard minimum payments. You will also end up paying just one-third the interest you would have paid using the minimum payment method.

How does the Debt Cascade Method Work?

The Debt Cascade is a powerful debt elimination action you must commit to and follow.

If you cannot afford to add any extra payment to your minimum payments, send this month’s minimum payments to your creditors EVERY month. Do not EVER decrease your payment just because the creditor is asking you for less month after month. That is the way minimum payments work. It is a percentage of your total balance (usually in the 2% to 4% range), so your required monthly minimum payment decreases as your balance goes down.

Once you have paid off your first account, use the former payment you were sending there and add it to the next debt on your list. At this point, the new “available” payment accelerator amount will function as the extra cash in the debt snowball, debt avalanche and debt landslide methods. You choose which account to forward the extra payment to, but make a choice and act on it.

Don’t start to spend that money again on consumer purchases once it becomes “available.” Your goal is to be debt free, not in continual debt.

An Example of the Debt Cascade Method

Here is a comparison of the Debt Cascade method against the standard Minimum Monthly Payment method. The balances are similar on the cards to make the demonstration easier to follow:

Scenario

Number of credit cards: 4

Balance on each card: $4,000

Minimum Payment Calculation: 3% of Balance

Annual Percentage Rates (Interest): 10%, 13%, 16% and 20%

Initial Monthly Minimum Payments: $120 for each account ($480 total)

Minimum Monthly Payments Method:

Time to Pay Off: 17 years

Total Interest Paid: $11,155 (an extra 70% of the original balance)

Debt Cascade Method:

Time to Pay Off: 3 Years 6 Months

Total Interest Paid: $4,649.30

Using the Debt Cascade method over minimum payments means you will be debt free 13½ years sooner and will have paid 58% less interest.

Keys to Debt Cascade Success

Besides committing to and sticking with your Debt Cascade repayment plan, there are additional actions you should take to see your plan through to success. They include the following:

  • Contribute to an emergency savings fund EVERY month, even if it is just a few dollars.

  • Put together a spending plan (aka “budget”) so you know how much you can spend on all aspects of your life.

  • If you get a raise at work, take on another job to earn a second salary, receive a cash gift, or get a tax refund, split the additional income between your emergency savings fund, a retirement plan, and your Debt Cascade repayment plan. You do not need to split the income evenly, but commit to contributing a fair share to each activity.

  • Continue to live below your budget so that you avoid consumer debts in the future.

  • Keep track of your progress. Create a line graph that shows your debt balances on the vertical (left) axis and the month on the horizontal (bottom) axis. After just four or five months, you will see a line forming that will point to your estimated pay off date.

  • Consider throwing yourself a debt freedom party. The month after you become debt free, consider using no more than half the money previously sent to your creditors to celebrate your achievement. It might be a small trip, a refreshed wardrobe, a service you have never paid for before (e.g. home cleaning, car detailing, etc.), or some other treat. Enjoy the feeling of freedom that you have just generated through your hard work and dedication.

Now that you have a grasp on how the Debt Cascade works, determine whether it is the plan for you. Consider the Debt Snowball, Avalanche and Landslide methods as well. Regardless which plan you choose, get started today. The sooner you start, the sooner you can celebrate your debt freedom.

Related Information: How To Get Out Of Debt Quickly