Use The 20 Per Cent Plan To Kill Debt Simply

Are you looking for a way to eliminate debt and start saving but dealing with interest rates and amortisation schedules is way more in-depth than you'd like? Try the 20 per cent payment plan, where 20 per cent of your monthly income goes to pay off debts, 10 per cent goes to savings and the remaining 70 per cent goes toward everything else.

Photo by Jay Tamboli.

Homesteading weblog Off the Grid News suggests that if 20 per cent of your monthly net income is less than the payments on your non-mortgage debt you may need to look into restructuring your debt, taking on additional work or radically changing your spending patterns to get your household balance sheet back on track.

Here's an example to put the plan into practice. Let's say you have a $48,000 annual salary (not including super), which means you take home around $3280 each month, after tax. According to the 20 per cent plan you should immediately sock $328 away in long-term savings and use $656 to reduce your debt, leaving $2296 for everything else. That $656 would include your car and credit card payments, but not your mortgage.

The 20 per cent payment plan was originally suggested by businessman and writer George Samuel Clason who is mostly known for having many of his sayings posthumously compiled into the book The Richest Man in Babylon. Even though the advice is a century old, it can still be a good way to reduce debt and save for lean times without spending hours pouring over financial data. If other plans have failed for you in the past you may want to give it a try.

A 20 per cent Payment Plan For Debt Control [Off The Grid News]


Comments

    I thought reducing debt is better than saving. Because savings has a lower interest rate toy what you are charged in interest. Long term it saves more.

      Yes and no - having savings in an emergency fund means that you don't hit the credit card and increase the debt. I also work on the principle that credit cards are for convenience not credit - so if I can't afford it, I definitely can't afford to put it on a card...

        That still doesn't hold. The compound interest on the extra unexpected cost will be more than the lost savings through paying the debt off as early as possible. People emotionally like having savings, but financially it makes no sense when the opportunity cost for not putting it towards the debt is higher.

        Poor financial advice there.

          Actually why is LH offering financial advice? Poor advice at that. Another example of extremely poor advice is at http://www.lifehacker.com.au/2011/06/pay-off-low-interest-debt-first-to-boost-cash-for-savings/

          People who require advice should be going to properly accredited financial and paraplanners.

          So when you need actual funds for an actual emergency, you're better off having no savings to dip into when absolutely necessary? I find that highly impractical and unrealistic.

            No, No, no, No - pay more off your mortgage as I mentioned, but the extra sits there is redraw for emergencies!

            So you need to have a redraw facility in your mortgage to take out the extra you paid off if you need it

    I go by a variety of this article and paying off the smallest debts first. I spent a few months saving receipts for all my expenses, and cataloguing them in an accounting software. Doing this let me find out how much money I was "wasting" per week on useless things, and I decided to take half that amount and put it on my debts. So, instead of being able to enjoy a few beers a couple of nights per week, I have them one night per week, etc... Then I pay off the smallest debts first, adding the expenses of them to the 2nd smallest once the smallest have been paid off and so on. A barely noticable change in lifestyle, but cuts nearly 13 years off the original 21 I'd have to spend paying off all of my current debts, bringing it down to little over 7.5 years...

    I ahve been using a variant of this system for a year now. I send 10% of my pay to extra debt and 10% to additional savings (total 20%). It works.

    I like the benefits this system gives me rather than putting it all on debt and having a pool to redraw from. My goal is to save up enough money for a house deposit and reduce my exisitng debt. This method allows me to work on both as well as build up a savings history and also evidence to show that i was paying off exisintg debt at beyond the min amounts.

    If you cant afford to pay it back before the interest free period then you shouldn't be buying it. Accruing unessential debt for luxury items is not a healthy way to keep up with the Jones.

    I recently dug myself out of a pretty deep hole using a similar system.
    Debt free now for just over a year and it feels pretty good. I don't have any credit facilities, so if I want to buy something I have to want it enough to wait and save. It's perhaps not surprising how much stuff it turns out I don't really want all that much. :)

    I also have a pretty decent savings pool now so that if an emergency comes up I'd be OK in most cases without needing to use credit. (which I don't have anyway).

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