As promised in my review of The Millionaire Maker, here’s a look at Loral’s 5 Step Strategy for Getting Out of Debt:

Step 1. Create a Debt Elimination Box

Gather up all your debt statements (credit cards, charge accounts, high-interest loans that are not against an asset, and any other outstanding credit or liabilities). For each debt make a list with the following information:

1. Name of the creditor
2. Amount owed
3. Minimum monthly payment
4. Interest rate

Step 2. Calculate the Factoring Number

Simply divide the amount owed by the minimum monthly payment to get the factoring number. So, if you owed \$3,000 on a credit card and your monthly payment was \$120, your factor for that card would be 25 (3,000/120). Do this calculation for each of your debts.

Step 3. Create a Priority Payoff Box

Arrange your debts in order of their factoring number from smallest to biggest. The debt at the top is your first priority.

Step 4. The Jump-Start Allocation

Loral suggests that you find \$200 extra per month (in addition to your current minimum payments) to use to pay off debts. For some people this is easier said than done. However, even if it means giving up cable TV and your cell phone, your number one priority should be to get out of debt. You can always get cable TV and your cell phone back after you are debt free.

Step 5. Debt Payments

Add the extra \$200 to the minimum payment of the first debt listed in your priority list. Then, once that card is paid off, apply that minimum payment PLUS the \$200 to the next card and get it paid off. Keep this up until all your debts are paid off.

There you have it. It seems very similar to Dave Ramsey’s “snowball” plan.

### 11 responses to A 5 Step Strategy for Getting Out of Debt

1. Let’s not forget that you need to change your habits if you’re going to get out of debt! A sound budget would do well for anyone that’s looking to start building their financial foundation.

2. Sometimes, it’s not in your best interest to pay off debt though. At least, not all of it. Making regular payments on credit cards, cars, and mortgages can build up your credit history and increase your borrowing power. In other words, lenders like to see that you’re a responsible borrower before they loan you money. If you’re debt free, it’s harder to figure out whether you’re a responsible borrower or not.

If you’re talented investor, you might also be better off investing your money than paying off debts. This is certainly a more gutsy strategy, but a lot of successful investors use it. When your credit cards are at 6% and you can invest your money for a 40% return, why take the \$10,000 you just made and waste it on paying down debt? You’re better off investing it.

3. Jon,

What you say may be true but in reality most people who have consumer debt have it because of mismanaging their money, not because they are investing it. Besides, one cannot count on a consistent 40% return so it is best to pay off credit card debt and THEN invest.

Really and truly a person should not have credit card debt.

4. Yes, that’s why I listed the qualifier of “if you’re talented investor.”

I’m not trying to be adversarial here. Just listing another opinion.

5. Why write down the interest rate when you aren’t going to consider it? Isn’t the best plan to pay down the loan with the highest interest rate first? Rather than calculating this “factor number?”

6. Getting out of debt is the first step to financial freedom. It’s a shame that personal finances are not taught in our schools. But of course outlining sentences is much more usefull in my day to day life.

7. The method above is great for people who have the knowledge time and discipline to follow through, many other people need professional help

1. - January 20, 2006

Weekly Roundup – 01/20/06

ItÂ’s time again for the weekly roundup. So, without further ado, here are some of the best personal finance blog entries that I ran across in the past week.

2. - January 23, 2006

[…] A 5 Step Strategy for Getting Out of Debt: AllThingsFinancial looks at Loral Langemeierâ€™s (author of The Millionaire Maker) debt reduction formula in A 5 Step Strategy for Getting Out of Debt. […]

3. - January 23, 2006

[…] The Canadian Capitalist is hosting the Carnival of Debt Reduction this week. My favourites: “Cash-Back Credit Cards,” “Contractions,” and “A Five Step Stategy for Getting out of Debt.” […]

4. - March 30, 2008

[…] rates are getting harder to find. Therefore, NOW is a great time to get your cards paid off. This post might help […]