Collection companies are buying up old debts – often called “Zombie Debts” – in huge volumes right now and turning them over to their collection agents.  But before you enter into any sort of agreement to repay that old debt, be aware you just might not legally owe it anymore.

The Federal Trade Commission and the State Regulators have agreements in place called “Statutes of Limitations” that set specific time frames for how long you are legally obligated to repay your old debts.  The confusing part of all this is that different types of debts are treated differently, and each State has set their own rules for time frames.

States have different time frames

So an old credit card debt in Nebraska, for example, will be treated differently than that same debt in the state of Washington.  Making it even more confusing is that if you have moved from one state to another since you opened that account, the creditor gets to choose which State’s law to use.

Still, it is worth checking out the Statutes of Limitations for your State before you repay something you don’t have to.  A real good sign that your old debt is beyond the time limit is the way your collector is handling your account.  Of course they’ll try to get the whole amount out of you first.  And then they’ll start offering you discounted settlement amounts.  But the final step is where they get very aggressive:  “Could you just make a small payment as a show of good faith?  Even $5.00 will do it.”

Why do they want you to make such a small payment so badly? 

Don’t they have better things to do with their time than try to collect $5.00 from you?  The answer is that ANY payment that you make towards these old debts will reset the time limit.

If you make even a $5.00 payment towards an old account – your Statute of Limitations starts over again.  Why?  Because the time limit starts from the date of your last activity on that account.  If you make a small payment, you are acknowledging that the debt is yours and are agreeing to repay it.

When dealing with phone collectors, I have two rules for you to follow:

• Never admit over the phone that the debt is actually yours – even if it is.  Just ask them to send you proof that the account is yours and a summary of what you owe.  Once you get that, you can decide to deal with them or not.  But (and remember that all these phone calls are being recorded) once you admit that account is yours, you are making it that much easier for them to get a court judgment against you.  
• Never pay a collection over the phone.  ALWAYS ask for a settlement letter by mail before you send any money in.  And while they are sending you the settlement letter, make sure the debt is yours and that the Statutes of Limitations haven’t expired.

In my State (Washington), the Statute of Limitations on a credit card debt is a surprisingly low 3 ½  years.  No payment in the past 3 ½ years?  No more legal obligation to repay the debt.

Want to find out more or find out your State’s limits?  Just search “Statutes of Limitations __Your State__” and you’ll find charts a-plenty.

Debt consolidation is a simple concept – pool all your outstanding debts into one manageable payment plan. This is a very tempting way to gain control of your debts. However, it could also land you into even more trouble down the road. If you do not change your spending habits, new debt will creep up.

Debt Consolidation – Only A Solution if You Change Your Spending Habits

While consolidating your debt online can be a solution, there are several factors that will decide if it really helps you. If you continue to spend above your means, then debt consolidation cannot save you from the deep hole of debt. Discipline and self-control, when it comes to spending, are the biggest factors to long-term financial freedom.

Whereas debt consolidation can be beneficial for your finances, it is more of a bandage for the problem and not an actual cure. Only prudence and good judgment on your part would be a true long-term cure.

Although consolidating your debts can and does help many consumers, you can also be faced with major risks and problems – especially ending right back into the debt hole that you are trying to escape. However, if are truly motivated and disciplined to step out of the red, then debt consolidation can be both your short and long-term solution. Below are several venues of debt consolidation that you could take:

• Home equity loan or line of credit: These types of loans are usually hyped up to get you out of debt quickly and easily through using the equity from your home. These are also called second mortgages, and they add to the full amount that you will owe on your home. Borrowing against your home can be a quick way to consolidate your debts – however, there is also a risk of losing your home if financial trouble hits again.

 

• Zero-percent credit card: Some people do not own a house, or they may not have available equity in their homes; in these situations, many believe that obtaining a zero or low percent credit card is the answer. While it could be an immediate answer, the problem is that this fix is usually just short term. That low introductory rate will not last for long, and in fact, after a few months, the rate will jump to the same high interest you were paying previously. Therefore, this is only a real option for those who have tremendous discipline to pay off their debts in a short period of time.

 

• Debt consolidation plans: If you have a serious debt problem, you most likely receive advertisements for institutional and online debt consolidation plans regularly. Convenience is probably the biggest attraction to these plans because it can turn a dozen monthly loan payments into one single payment a month, usually at a lower interest rate. The trade-off to the ease and convenience is that you have to cancel most or all of your current credit cards, you have to pay a monthly administration fee, and the loan is spread out for a longer period of time. Paying less per month only means paying your debt off slower. In the long run you will likely pay more in overall interest.

 

Managing your debt first takes the realization that you have a problem, and then discipline to pay it off without collecting new debts. There are many techniques and plans out there, and a reputable credit management company will help you with a consolidation plan and schedule. Stick with a plan, remain disciplined, and you will begin to feel the load gradually ease.

Credit Cards, and How They Work

There are certainly many advantages to having a credit card. It is a convenient way to make your purchases without having to carry cash or your checkbook with you. However, when you compare the tremendous negatives of credit cards, the drawbacks quickly outweigh the benefits.

The credit card companies earn their greatest profits from the exorbitant interest rates they charge consumers. When you receive your statement monthly, it outlines the details of all of your activity, including purchases made, any late or outstanding fees, interest payment, and the total amount owed.

The card holder has to pay a minimum amount of the total bill by the specified due date. If you pay the bare minimum, the remaining balance gets charged interest and is carried over to another month.

The danger of credit cards stems from the interest that consumers must pay on their purchases – if the debt is not immediately paid, then the initial interest accrued becomes part of the total amount owed, which is subject to additional interest. It is identical to the technique of compound interest, but this time it is working against your financial health.

Credit Cards and Your Credit Report

When you have credit cards, they will be listed on your credit report as a revolving account. The credit bureaus give a rating on how well you pay your monthly amount due. The ratings range from 1 – 9, with 1 being the very best payment history. They will be listed as “R” for revolving, followed by the rating, such as: R1, R3, R9, etc. Therefore, how you manage your credit card debt and payments is directly reflected on your credit report, which can impact not only your interest rates for mortgages and car loans, but even the type of jobs or leases you can obtain.

Choosing different credit cards for different solutions

Because of competition within the credit card business, providers have developed many incentives to gain market share, such as gift certificates, frequent flyer miles, and cash back. For many credit cards, the more you charge, the more rewards you will receive. Unfortunately, this is how people plunge deeper into credit card debt.

There are several different types of credit cards that fit various needs, depending upon your financial history and spending patterns. In general, cash rebate cards are the most valuable, as you do not have to accrue “points” to gain limited rewards; instead, you can use your 1% or 2% cash back to purchase whatever you would like – or put it into your savings account.

Below are some of the many types of credit cards:

• Low Interest Credit Cards – People with excellent credit qualify for credit cards with reduced interest rates.
• Instant Approval Credit Cards – There is no waiting period required for this type of credit card because it is approved instantly.
• Bad or No Credit Credit Cards – People with bad credit or no credit at all can obtain these types of cards, but the interest tends to be exorbitantly high.
• Rewards Credit Cards – This credit card lets you earn prizes, points, and other rewards when purchases are made.
• Cash Back Credit Cards – Earn rebates for cash back and cash incentives when you use the power of your purchases.
• Student Credit Cards – These cards are specifically designed for college students with little or no credit history.
• Business Credit Cards – These are an effective way to manage business expenses, whether for a small business or large corporation.
• Balance Transfer Credit Cards – This credit card consolidates credit card debt into one low payment.
• Hotel & Airline Credit Cards – Exotic vacations and future business trips earn flying miles and points.
• Prepaid Credit Cards – These offer the convenience and benefits of standard credit cards, but spending is limited to your own prepaid credit limit.

Credit Card Debt Management Tips

There are many trustworthy organizations that can advise you on how to get yourself out of credit card debt. The National Foundation for Credit Counseling would be the first place to search for a customized credit card debt solution. They have highly qualified counselors can create a customized financial plan to help you accomplish your own credit card debt solution.

The following tips are helpful as a credit card debt solution; however, if you do not have the motivation or discipline to reduce your credit card debt, then you may want to contact the NFCC or other debt management programs. Through a personalized credit card debt solution, you can become debt free. There are several easy strategies that you can implement into your daily life to begin reducing your debt:

• Try to “Kill” accounts. Focus the majority of your resources towards one account at a time until you kill it completely. (BUT DO NOT CLOSE THE ACCOUNT ONCE IT’S PAID OFF!!!)
• Paying off credit cards with the highest interest rate first is a good idea, but killing off smaller accounts first may allow you to free up extra cash flow – providing more money to pay down other debts.
• Pay slightly over the minimum due on all revolving accounts to minimize the chances that the card issuer will raise your interest rate.
• Transfer high interest rate credit cards to ones that have lower interest rates – but ONLY if you’re sure you’ll be able to continue making the minimum payments on time.
• Refinance your house and include the balances onto the lower-interest home-equity loan (Be careful with this, or you may lose your home if you can’t pay the loan!)
• Do NOT close any accounts – even those with zero balances. You will NEVER increase a credit score by closing an account. The exception is closing accounts that charge annual fees once you’ve gotten your credit score where you want it.
• Do NOT spend all your money each month on paying down debt. Even though you have debt, don’t neglect building up your savings accounts. The best way to reduce debt is to make sure you don’t have to continue using credit cards to pay monthly expenses, and only when you have a savings cushion is that possible.

After having taken these steps to get out of credit card debt, it is important to evaluate your budget and spending patterns to prevent future debt from accumulating. Having credit is useful, but if it is not handled carefully, you could find yourself having to seek a more drastic solution to your credit card debt.

Taking out a short term loan from a Payday lender with an effective annual percentage rate that makes most hand-held calculators produce an “error” message doesn’t sound like a smart financial decision. But is it really that cut-n-dry?

It is easy for someone who has money and is paying the bills on time to judge you and tell you that pay day loans are evil and immoral works, preying on the weak and helpless, because they are so expensive to pay off. But is it really that easy to dismiss this idea as a viable financial option for you? Let’s look at the realities of people living on the edge of financial ruin and see if this isn’t something that could be a positive idea in some cases.

The Negatives Are Obvious

The negatives of payday loans are obvious: They are flat out expensive. You can typically borrow up to a max of $700 and it usually has to be repaid within 7-14 days. Let’s calculate the math here:

• Your fee for this would typically run about $100 in “service charges” and interest
• You borrow $700
• You pay it back in 14 days

So, $700 borrowed with $100 interest for 2 weeks gives you an annual interest rate of around 500%. Kripes! That’s a lot of interest! Some places will let you borrow a little more than this and some places will let you take a little longer to repay it, but don’t kid yourself – that is a lot to pay for a little bit of money.

So why would anyone do it? Shouldn’t there be a law against it? It seems ridiculous to pay that much – at least until you get into a situation where you need to. And what kind of situation is that?

A Smart Financial Tool?

Here are a couple scenarios where getting a payday loan could end up saving you thousands:

• Without this money, your credit card payment will be late. If you are late on your credit card payment, the interest charged on your remaining balance will jump up to the “Default Rate” clause on your card agreement – meaning they’ll jack up your interest rate to a ridiculous level and likely increase your minimum payment calculation as well. You had a nice 9.9% interest rate and were paying $300 a month on your $10,000 balance. One missed payment and suddenly your rate is 24% and the minimum payment is now $800 a month or higher. Paying that $100 Pay Day loan fee to prevent this just saved your butt.
• One 30 day late on any credit card will likely trigger the “Universal Default” clause on many or all of your other credit card accounts. Multiply what happened above by ALL of your credit cards.
• One 30 day late will lower your credit score – which will likely trigger higher auto insurance premiums and prevent you from obtaining future credit at favorable terms.
• Late on a mortgage payment or car payment? If paying a $100 fee can prevent that – it is money well spent.

Are Your Finances On Terminal Life Support?

The problem with using payday loans occurs when you make it a month after month habit. Using these services should be a temporary, once in a great while, bandage. If your finances are on terminal life support, a payday loan isn’t going to help you.

But if getting through the next couple of weeks buys you enough time so a solution can be found (maybe getting a 2nd job will solve your situation, but it’ll take a couple weeks to get your first paycheck, for example), then by all means, save your credit rating! There are a lot of people out there who wish they could spend a mere $100 for a higher credit score or having their credit card rates set back to where they used to be.

Payday Loans – Rip Off? Certainly! Smart Financial Tool? Sometimes… but only when used wisely by people who have an exit strategy in place.

The goal for this assignment is to attempt to actually prepare for the future instead of constantly reacting to the present. Wouldn’t it be cool if when that car of yours needs replacing or your daughter needs braces that you actually have money set aside that you can pay cash for it rather than trying to figure out which of your wallet-full of credit cards has enough room on it?

By the way, having this plan in place and getting your Buckets fully filled is called “Financial Security” – and it’s very, very nice when you get there. And you CAN get there, regardless of where you are in your financial life right now.

Let’s Get the Short-Term Bucket Filled, Shall We?

Okay, your short-term Bucket, by definition, consists of any significant expenses coming up in the next year. Things like:

• Replacing a vehicle
• Dental procedures
• House repairs
• Down payment on a house?
• Vacation
• Season Tickets to your favorite sports team
• 6 months of salary (an absolute MUST!)

Put a dollar amount on these items – that’s your Short-Term Bucket list. I don’t care what you put on the list – it’s YOUR list – but we need a dollar amount to shoot for. Because that’s how we’ll know when the Bucket is full.

Maybe you currently have absolutely zero money in savings right now. That’s actually NOT unusual at all, so don’t beat yourself up. Well, okay, beat yourself up a little, but then get over it.

If you find you need some help getting started, check out some of these articles on this website: “Get $500 In The Bank Now!”, “How To Get $500 In The Bank – FAST!”, “Need Cash? Try an “Income Blitz””. These articles will link with other similar articles, and you can learn how to jumpstart your savings plan.

Getting Specific

Your savings vehicle for your Short-Term Bucket is going to consist of:

• Cash under the mattress (Hey, some people LIKE having cash around – and that’s okay. If you have it, it’s part of your Short-Term Bucket.)
• Savings & Checking Account
• Vacation Savings Account
• Money Market Account
• Short-Term Certificates of Deposit

These vehicles are readily available to you – easily accessible for those short-term needs – and NOT susceptible to market ups and downs. And this is where you get the money to pay for those Short-Term items on your list.

Time For Tough Love

You put a lot of “needs” on your short-term list, and the amount of money you have filling this Bucket isn’t going to cover all of them. Right? Like, maybe you “need” a new car, or you promised your kids a Wally World vacation this summer, and if you don’t renew your season tickets this year you’re going to lose your seats – forever!

Awww… Choices. Aren’t they fun? Are you going to keep spending money you don’t have? Or are you going to reach for “Financial Security”? That’s what you’re facing right now. If your Short-Term Bucket doesn’t supply your every Short-Term “Need”, you’ve got to cut down on what you think a “Need” is.

For example, you don’t NEED a NEW car – nobody does. What you NEED is transportation. You can find a cheap used car, you can ride mass transit, you can borrow Mom’s old Crown Victoria for awhile. The NEED is to be able to get back and forth – the DESIRE is to maintain some sort of “status” with the friends and co-workers. You simply may not be able to afford your DESIRES right now.

Fill the Short-Term Bucket, but do it without neglecting your other two Buckets. (See “How Do You Fill the 3 Buckets?”)

Again, I don’t care what you put on your lists – they are YOUR needs, not mine. You’ll just need to figure out a way to pay for them from your 3 Buckets as they occur. When you get to this point – where all your future needs are being funded as you go without incurring additional debt – you have reached “Financial Security” and life is good.

Divide Your “Extra Money” Into 3 Parts

Remember, half of your “extra money” is going towards debt reduction, and the other half is going towards savings and investment (or as we put it in a previous article – towards “future debt reduction”). I want you to divide the half that is going towards savings into 3 equal parts. This is going to seem crazy, but it works!

Take these 3 equal parts and put 1 part into your Short-Term Bucket, 1 part into your Mid-Range Bucket, and 1 part into your Long-Term Bucket. When you are first starting out, you may just have to put all of your “extra-money” into a savings account for a little while until you get this thing rolling a little bit. But just understand that the idea is to put a equal part each month into EACH bucket.

We have a separate article on our website here that talks in greater depth about each of our 3 Buckets. But I just wanted to take one article to give you an overall view of HOW you’re going to fill the buckets..

The 3 Buckets are Different Sizes

When you first start out, all 3 Buckets seen HUGE! How in the world are you going to get enough money into savings to pay for all your short-term needs this year? Let alone putting away enough money for college for the kids and retirement and world travel later on? Especially since you’re supposed to be dividing your “extra money” in to 3 parts and putting a little into each bucket equally?

Here’s a couple of keys to give you a glimmer of hope:

1. Because you have debt you’re trying to pay off, only HALF of your “extra money” is going towards these 3 Buckets. Once you get the debts paid off, you’ll have an “extra half” to add to your Buckets – doubling your savings! That’s huge! And because you’re not taking on more debt along the way, and you’re making better spending choices, and you’re earning more money – you’ll start having even more “extra money” to apply.
2. This system helps you prioritize your spending and sort out “needs” from “desires”. Maybe you have a short-term need to buy, but you don’t have enough in your Short-Term Bucket to pay for it. This system, if you can resist the temptation to take on more debt, will help you find alternatives to that “need”.

Maybe you have a child ready to start college this Fall, but you have no college savings. It would seem you would “need” to take out a student loan to pay for the college of her choice. Don’t want to let the kids suffer because of YOUR lack of foresight. But your kid doesn’t NEED to attend that college in the Fall. Instead of spending money you don’t have, opt for a Community College for a year or two (seriously, the classes are about the same and will transfer over at full credit) and this will allow you time to fill your Mid-Range Bucket to pay for the final years, AND it will teach your kid a valuable lesson about financial management.

You’ll put money into the 3 Buckets equally, but the 3 Buckets aren’t the same size. Your Short-Term Bucket is the smallest one – and you can make it even smaller by cutting back and making different choices as you go. Your Mid-Range Bucket is the next smallest one. And your Long-Term Bucket is the biggest one – so big it can never be filled completely.

Once you’ve filled the Short-Term Bucket, you’ll be able to start dividing your “extra money” into only 2 parts – half goes in the Mid-Range Bucket and half goes in the Long-Term Bucket. And then, once the Mid-Range Bucket is full, you get to put ALL your “extra money” into the Long-Term Bucket. This is a really good time in your financial life – all your short and mid goals are funded and you’re just building wealth for the future. Nice!

Set up your 3 Buckets TODAY! Don’t wait until you’re better off – do it NOW! Better off ain’t coming unless you take action on this right away. It’ll change your life because you’ll finally be in control!

Absolutely wrong! The problem with this way of thinking is that it causes you to get defeated by upcoming obligations and financial “surprises”. You’re spending every dime you can spare on paying down debt, and then, BAM! You get hit with an unexpected car repair, an appliance that needs replacing, a medical emergency, etc. And you have no way of paying for it except to take on more debt. And all your hard work goes to waste – so why even bother…

A better approach is to understand that short-term expenses – those things happening in the next year – are going to happen in the next year. Your mid-term expenses – those things happening in the next 2-5 years – are going to happen in the next 2-5 years. Etc…

That’s Pretty Obvious…

Yes, it’s obvious. But those caught up in debt very often fail to believe it. You pay your extra money towards your debt, and your short-term expenses cause you to take on more debt this year. Then the mid-term expenses start hitting you, and you’re still reeling from the short-term expenses that you couldn’t afford.

And if you continue this cycle, pretty soon your long-term expenses are upon you, and you have absolutely no way to pay for them because you still have short-term and mid-term expenses that still aren’t paid for.

A Better Way of Thinking:

In the article, “The Half-n-Half Way to Improve Your Finances”, I suggested that you should begin dividing your “extra money” into two parts: Half-n-Half. (“Extra Money” is defined as money you save by reducing your spending, earning more money at work, or earning more money on-the-side.)

Use half of your “extra money” to pay down debt. Use the other half to fill your 3 Buckets. I’ll get in to more specifics on this in future articles. You still may be resisting the idea and it’ll be extremely easy to pull this savings out before it’s intended use comes around. But maybe it’ll be helpful to think of it this way:

Future Expenses = Future Debt

Your 3 Buckets are future expenses, i.e. future “debt”. So by setting aside half of your “extra money” to fund these future expenses, you’re not actually “Saving” anything. All you’re doing is paying off your future debt NOW. That “Future is NOW” thing kinda makes sense all of the sudden.

Again, half your “extra money” is paying down past debt and the other half is there to pay for future debt. So really, ALL your “extra money” is going towards debt this way. But the beauty of it is that your future debt will cost you far less this way, because you’ll be able to pay for it in cash without incurring a nickel’s worth of interest. And really, interest is the reason debt is so crippling and debilitating.

What Franklin was trying to teach us with this story was that purchases based on emotion – desire & want – are almost always bad purchases. Whenever you emotionally pass the point where you can no longer “walk away” from the purchase, you are going to make a bad decision.

Franklin knew in his head that the whistle was overpriced and not a good deal, but he became emotionally attached to it and couldn’t walk away – and he regretted the impulse buy for years. One of the wealthiest men in the world regretted buying an overpriced whistle as a kid. Why? It wasn’t the whistle that was bad, it was the loss of self-control that was bad.

The whistle story is a great example of how to evaluate everyday “minor” purchases – the ones you hardly notice yet are draining money from your wallet at an alarming rate. I’m sure the whistle didn’t cost Franklin very much all by itself, but the lesson it taught him about spending money wisely was priceless.

Elsewhere on this website, I gave you an assignment to locate your “Latte Factors” and eliminate these expenses from your daily spending. Why? Because, as Franklin once said, “Anything is costly, no matter what its price, if it purchases nothing of importance…”

Eliminate the leaks and the “purchases of nothing of importance” from your spending and you’ll be well on your way to the debt-free reality you long for. It is rare that debt problems are caused by lack of income. Instead, debt is caused by not spending the money you have wisely.

Are Credit/Debit Cards to Blame?

Is it too easy for you to spend money? Maybe you’ve simply lost the connection between income and out-go? Mentally, you may no longer see that purchases put on a piece of plastic are actual out-go’s of cash. You look in the wallet and see there’s not enough cash to complete the latte, the fast food, the “Honey, stop on your way home and pick up a few things from the grocery store and I don’t feel like cooking tonight” purchases, so Plastic to the rescue!

Swipe and forget – and the balance due on your credit card statement grows larger and/or the amount set aside in your checking account to pay the credit card bill grows smaller – and you didn’t even notice it. Does this describe you? Be honest. Are you reading these articles to find some miracle way to get out of debt?

“A CHECK??? Let me see if I can find a pen – Geesh…”

Maybe what you need to do is start making it harder to buy things. Keep the plastic at home. Start writing checks (nothing will dampen your spending habits faster that the pain of trying to buy things with a check these days with all them “friendly” merchants sneering at you and making such a show of letting you and everybody around you KNOW what a big jerk you are for trying to actually write a check, for GAWDS SAKE!) or paying actual “cash” for things.

Keep a twenty in your glove box for emergencies (and forgetting to fill the gas tank should NOT be an emergency – but it often is, so now you’ve got enough cash to get you home) and keep the plastic at home. Painful? Yeah. Embarrassing to have to tell your co-workers that you can’t go out to eat with them because you don’t have any way to pay for it? You bet. But if you’re truly serious about getting out of debt – an absolute necessity!

One common “Latte Factor” that many people have has to do with their eating habits. These faulty habits are also one of the primary reasons why Americans have gotten so unhealthy in the last 30 years, sending obesity, heart disease, and diabetes rates soaring.

Are Your Friendships Slowly Killing You?

Tell me if this sounds familiar: You’re approaching the noon hour at work and your co-worker says, “Where do you want to eat today?”. After 10 minutes of back-n-forth, you finally decide where to go. Seeking novelty and mouth-entertainment, you end up spending $10-15 on yourself before heading back to the office (When did these restaurants start charging $2.49 for a glass of pop anyway?). Each day, your waistline gets fatter and your wallet gets slimmer, but you don’t want to be accused of being unsociable, do you?

For you Oprah watchers, you’ve no doubt seen her favorite health guru – Dr. Oz – bring out bowls of body parts to show what bad life style choices do to the body: The black lungs of a smoker, the over-sized belly-fat memento of an obese person, etc. One of Dr. Oz’s best-selling books is titled You: On A Diet and he details many of the body-destroying effects of poor eating habits. For solutions, I’ll save you 370 pages of reading by summarizing his main idea: Make your eating “automatic”.

Let’s Do Something Crazy For Dinner Tonight!

Dr. Oz’s big eating plan is to take two meals a day and eat the same thing every day. He suggests making Breakfast and Lunch automatic, and then you can go crazy with dinner. By making healthy choices for these two automatic meals, you’ll lose weight, you’ll have more energy, and you’ll save money.

Remember those old sitcoms where the wife always sent her husband to work with this black, metal lunchbox? That kind of behavior is seen as “weird” these days. But if you’re looking for a way to save more money, get out of debt, and afford your new house payment AND get healthy enough so you can enjoy the home for a long, long time, Dr. Oz’s plan is “right on the money”.

You’ve probably been told that in order to afford what you want, you’re gonna need to “tighten your belt”. Follow this plan, and you won’t need to “tighten” anything – you can just wear a smaller belt.

Imagine if both husband and wife did the same thing – would $600 in savings each month get your finances (and your fannies) in better shape? Don’t “eat yourself out of house and home”.

Well, don’t fret. Sunnier days are on their way, if you can figure out a good way to start getting rid of some of your accounts. And in this article, I’d like to give you a quick little formula to help you pay off your debts faster and more efficiently and start making progress towards being debt free again.

Don’t Drain Your Accounts

First, I don’t want you to drain your bank accounts or spend every last dime you have on this formula, but you may have some money you can start using for debt reduction right now. So this formula is designed to show you which debt to focus on first.

The idea is to concentrate on paying off completely one debt at a time. You make only the minimum payments on all other accounts and then take all extra debt-reduction money and concentrate it on one account until it’s paid. Then you move on to the next account. But which account do you choose?

Forget What You’ve Heard

Forget everything else you’ve heard about debt reduction. I want to introduce you to the S.P.F. formula. S.P.F. is a common acronym used on sunscreen lotions to let you know how strong the protection is. In our case, the S.P.F. stands for “Supercharged Payoff Factor” (Sunny Days & S.P.F. – Hey, I think I’m clever…) and we’re going to use it to determine how strongly each debt is affecting your overall finances. By getting rid of the debts that are tying up more of your monthly budget, we can free up money to pay off the other debts faster (and raise your credit score faster too).

To calculate your S.P.F., your take each debt account and divide the outstanding balance by the minimum monthly payment. For example, a credit card has a balance of $10,000 and your minimum monthly payment on it is $300. Your S.P.F. is 33.33 ($10,000 divided by $300). Another account has a balance of $500 and the minimum payment is $50, so the S.P.F. is 10.

Calculate Your S.P.F.

Calculate the S.P.F. on all your debts. Then rank them in order from lowest S.P.F. number to highest S.P.F. number. The debt you’re going to concentrate on first is the one with the lowest S.P.F. number. Why? Because this is the account that is taking a higher proportion of your income each month compared to the size of the debt. If you don’t understand that math – that’s fine. Just trust me, by getting rid of your lowest S.P.F. account, you’ll free up more cash flow each month, giving you more money to apply towards your next lowest S.P.F. account. And soon, you’ll have more Sunny days ahead.

Look at this example:

By focusing on the “Bank 1” account with the $500 balance, you can kill it off and not have that $50 a month obligation anymore. That $50 can now go towards paying off AB Auto. Once that’s gone, now you’ve got an extra $277 a month to get rid of Big Card.

You are now gaining momentum and the debts are disappearing, and hopefully your disposition will be turning sunny and bright again. Don’t forget to slap on the sunscreen!