How the "Accelerator Margin" Can Get Private Debt Under Control
by Ellise Walsh

The purpose of this article is to discuss a principle of debt and money management called the “accelerator margin”. Often times the problem with debt management stems from the fact that it just isn’t fun. So we often avoid doing it. This only makes the problem worse because we incur late fees due to avoidance which run up our credit debt even further. So here are a few tips to avoid avoidance:

• Set a time at least once a week to go over your bills to make sure you are paying them on time

• Create a way to track debts like credit cards or other forms of loans. As you manage each debt, update your log or spreadsheet. I like to use an Excel spreadsheet. This puts everything on one page and gives you a sense of control that you have herded all your problem bills into one bin to get some fences around them

• Plan to manage at least one bill each time you look at them. Once you do take some management action on it, give yourself a reward so you feel good about being the boss of your debts. You will usually manage more than that because you feel good about what you are doing

  

It is so easy to feel that “out of control” sensation when it comes to debt. The method we are going to discuss here which we call the “Accelerator Margin” replaces that sensation with a great deal of control. That alone makes it worth the effort. But if you can maintain the discipline of the Accelerator Martin system over time, you will get out of debt, usually in less than 8 years.

Define It

Before we get into the technique, let’s define the term. The accelerator margin in basically that a portion of your current income that we will identify to be set aside for debt reduction. Now it’s easy to say, “That’s Impossible!” I think you will see after we do a systematic review that there is Accelerator Margin lying dormant in your budget and we can leverage to defeat this beast called debt.

Categorize it

The first step in setting up the Accelerator Margin system is to spend some time with your check register. What you are going to do is do a review of your check register. Usually six months is sufficient and you will categorize your major spending activities. If you have a tool like Microsoft Money or Quicken, this can be done with a simple report.

You are looking for some totals of how much you spend in each category. If you can get a weekly and monthly total for each category, that’s perfect.

Now for each category come up with a percentage you can cut. Some categories cannot be cut like utilities but some you can control. For example, suppose you look at your cable bills and see that you can drop them 12% by dropping HBO. Just remember, this is just temporary until we tackle this debt. So your cable TV accelerator margin is 12%. To get your total accelerator margin, average the margins of every reducible category you find. Your goal is 10% to really put a hole in that debt wall.

Apply it

Now comes the math. Go through every one of your latest credit debt bills and make a table. Put down the creditor, the total owed and the monthly payment. Now fire up the calculator or your computer. Divide the total payment by the monthly payment and put the answer in a column for each debt.

Now you sort them assigning a priority number to each one. But you go in reverse order so #1 is the lowest division answer, #2 the next lowest etc.

From that point forward you make the minimum payment to each of the bills from #2 on down. Then you take the Accelerator Margin amount you identified in the previous step and pay everything extra you can on the #1 item on your list. This will probably be your lowest debt which goes against your instinct to pay the biggest one first. By paying that one off, you have all that money available to attack the next one and you leave the biggest beast for last.

It really isn’t that difficult. Do the exercise and stay on the system for six months and you will see those debts begin to die out and you get control of your budget back.

If you'd like to submit your own article click here!

All information contain within is owned and Copyrighted by PlanaBudget.com ™.
All information is deemed to be accurate but is in no way guaranteed.