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Credit Card Debt

Credit card debts - a scary tool no matter how I see it.  I was working with one of my close friends over his finances - the second one in six months.  During the first, while the balance at $8,000 debt is not healthy, its was still manageable.  Hence, I did not stop him from consolidating his existing debt to one at a significantly lower one, at 6.88%.  Since then, his debt had ballooned to $16,000, which in relation to his current salary of $2,000 is crazy.

Four hours of computing and fact finding later, we managed to find a way for him to work himself out of the debt, albeit with some sacrifice on his monthly expenses and with 4 years of his time.  This, for just a short period of 6 months of instant gratification, is simply incredible, and shows the power of debt.

Lets go through the list of how-tos to remove himself from his debt, with the following basic principles in mind:- 

1. To maintain a fixed saving plans before any other things

    a. Short term savings - for monthly splurging on anything, and must be spent every month

    b. Mid term savings - for planned expenses such as travel, LCD TV, big birthday or anniversary treats, or payment of debts

    c. Long term savings - for building wealth/ financial freedom via investment

2. To ensure all income, expenses, assets and liabilities are accurately itemized

3. To pay the minimum on all credit facilities and to clear easiest debt to clear first

First, we established his positions as follows:-

Income		Expenses
Salary	$2,000	Short term savings	$150
		Mid term savings	$150
		Long term savings	$100
		Food	$160
		Mobile Phone	$40
		Insurance	$60
		Car (all inclusive)	$960
Total Income	$2,000	Total Expenses	$1,620
Assets		Liabilities
Car	$25,000	Credit Card 1@24%	$3,000
		Credit Card 2@24%	$3,000
		Credit Card 3@24%	$2,000
		Line of Credit 1a@6.88%	$3,200
		Line of Credit 1b@18%	$1,800
		Line of Credit 2@18%	$3,000
		Car loan	$38,000
Assets	$25,000	Total Liabilities	$54,000

Based on the terms and conditions of the credit card facilities, minimum payment for the credit cards shall be 3% of the total debt.  If the debtor consistently pays the 3% a monthly basis based on the original amount owed, it would take him 5 years to clear the debt.

The main problem for him is the debt consolidation efforts, which required a total of $980 from him, which alone would make it impossible for him to meet his minimum payment, even were he to not have any savings.  The opportunity cost for any debt consolidation efforts is hence minimized when the monthly payment is 3% or less.  For a 6.88% interest, the minimum period of loan shall be 36 months and the monthly payment shall be 3.08%.  Hence, the first thing I asked him to do is to talk to bank for Line of Credit 1a to extend his payment period to 36 months.

The minimum payment for the credit cards are as follows:-

1. Credit Card 1 = $90

2. Credit Card 2 = $90

3. Credit Card 3 = $60

4. Line of Credit 1a = $98.63

5. Line of Credit 1b = $54

6. Line of Credit 2 = $90

Hence, the total minimum sum he has to fork out is $482.63.

Next I asked him to use his mid-term savings for the next 3 years to clear his debt, and only pay the minimum for all his debts, with the exception of the one with the lowest repayment at any period in time.  Hence, his total payment plan for his unsecured credit is $530.

The following table shows my plan for him.

At the end of 44 month, at 0% interest, he should have $4,400 in cash.

At 10%, he should have $5,288.71.

Based on current financial situation and the vast discounts in stock prices, its not too difficult to get an overall 20% returns on investment for the next 3 years at least, and so this is what I project for him, provided he can stick to his plans.

At 20%, he should have $6,416.78 in 44 months.  Not much but it should help!

This solution comes from some time of permutations of paying, and is mainly for information.  Anyway, I hope this can help those who needs help, and for those who don't, I hope you will not need this.  Stay rich all.