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Business Money Management

The following transcript reviews debt paydown and is presented by Clay Clark, US Small Business Administration Entrepreneur of the Year, and Tim Redmond on Thrive15.com, a premium Ohio business college.

Tim Redmond:          When we get into the debt reduction plan, I recommend what a lot of financial planners call the snowball.

Clay Clark:                OK.

Tim Redmond:          The snowball paydown.  We've got this on a chart here.

Clay Clark:                Yeah.

Tim Redmond:          Where, when we want to pay down our debt we first of all, we want to get a list of all of our debt.  A lot of times people will not want to get a list of all their debts.  They don't want to know where they're at because it's so painful.  It's going to reveal all their bad habits.  Well, not wanting your bad habits revealed doesn't get rid of the bad habits.  You need to embrace them and so we're telling people just embrace where you're at.  Find out exactly where you are.

                                  I recommend, first of all, you get a list of all your debt.  You want to get a list of all your debt.  Here we have a visa credit card, balance of $800.  Discover of $3,200.  A car payment of $13,400 and you have a house of $205,000.  There's a lot of our people watching now that says, "You mean you can buy a house for $205,000?"  And, some of this is like a half a garage.  Or a garage door but, anyway.  So, you have this.  We have the total amount of money that we have.  So, what is the debt pay.  What is the snowball effect?

                                  What we want to do is we want to line up all of our debt that we have and we're not so concerned about the interest payments.

Clay Clark:                 OK.

Tim Redmond:           I mean the interest rates.  A lot of people say well you want to pay off your highest interest rates first.  I don't recommend that.  I recommend that you take the lowest balance and move up to the highest balance.  Regardless, of your interest rate.  The reason for that is, that the debt paydown is not just a logical process.  As a matter of fact, it's more of a psychological and an emotional issue.  You want to get an early victory as soon as you can on that.

Clay Clark:                  OK.

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Tim Redmond:           So, you get this list.  You put them in order of balance that you have.  What is the minimum payment that is required here?  Then, what's really key here on the snowball effect, Clay, is you want to be able to have an extra debt payment that you can set aside each month. 

Clay Clark:                  So, step 1 is I'm going to list all of our debts from the lowest balance on top to the highest balance on the bottom.

Tim Redmond:           Yeah.

Clay Clark:                  OK.  And then step 2 is we want to list the balance and the minimum monthly payment and the number of payments remaining.

Tim Redmond:           Yeah.  We've got the balance here.  We've got the minimum payments.  We've got the number of payments remaining.

Clay Clark:                  OK.

Tim Redmond:           Alright.

Clay Clark:                 And then the 3rd thing, I guess, you're 3rd principle is we want to determine the extra debt payment amount.

Tim Redmond:           OK.  So, when we want to really get serious about paying down our debt we have the minimum payments each month on each of our debt that we owe.  That is a total of $1,750 a month.

Clay Clark:                 Yep.

Tim Redmond:          The extra debt payment is saying listen, every month we have this $1,750.  How much additional dollars do we want to pay down against our debt amount every month, month in, month out.  That is, in this thing's illustration, we're going to set aside $300 to add to that $1,750 so that we've got now a total of $2,050 every month that we're going to apply against our debt.  Here's how we're going to do that. 

                                  How does it say the 4th step is?

Clay Clark:                Well, the 4th principle, or 4th step it says is create a new column for adjusted remaining payments based on adding the extra debt payment amount.

Tim Redmond:          OK.  So, here we go.  Right over here.  This is the column we're talking about here.  Is this adjusted number of payments that are remaining.  Now, this Visa card, we're going to pay this for 25 more months.  OK.  With this new plan, where we were paying $40 a month on this, we're still paying the other bills.  We're not forgetting our other bills, OK?  But, we're going to add this $300 and we're going to add this to the $40 right here.  So, we're going to put in our snowball payment is going to be not just $40 but $340.

Clay Clark:                So, you're building up momentum.

Tim Redmond:          We're building up momentum from the first day on board here.

Clay Clark:                I love it.

Tim Redmond:          The real key on this snowball paydown strategy is we've got to set up an extra debt payment.  It's almost like a savings account.

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