So you're ready to get going, aren't you? Good, because now I'm going to share with you a system to pay off your debts that is so simple you can be up and running with it in less than an hour.
Yes, you read that correctly! If you follow the instructions I am about to lay out for you, in less than one hour you will have a foolproof system to pay off everything you owe once and for all.
The system is called DOLP ®, short for Done On Last Payment. (In my previous books, I wrote that DOLP stood for "Dead On Last Payment," but readers suggested that "Done" was more motivating than "Dead"-so I have changed it). The DOLP system is the cornerstone of your Debt Free for Life Plan. I've been talking about DOLP for well over a decade now. I've taught it to millions of people on shows like Oprah and NBC's Today, and through numerous appearances on ABC, CBS, Fox, and other TV networks. I've also described it in a few of my previous books. There's a good reason I've stuck with the DOLP system all these years: it's simple and it works.
Are you ready? Great - let's go.
GET STARTED ORGANIZING YOUR DEBT
The first step in DOLPing your way out of debt is to get organized.
It's a lot like getting on a scale before you start a diet. You have to step right up, open your eyes, look down-and face the truth.
Debt is something you need to see in black and white. You can't expect your Debt Free for Life Plan to work-and you won't be able to measure your progress each month as you pay down your debt-unless you start off knowing exactly how much you owe.
Are you excited? You should be. You're about to change your whole life.
GO GET YOUR CREDIT CARD STATEMENTS
To start the process of getting your debt organized, the first thing you need to do is go and get all the statements and other documents from every credit card account you have. Then go and get some folders. (Ideally, they should be red so they will stand out in your file drawer.) Now create a file for each different credit card account and label it appropriately (e.g., "Visa Credit Card").
From now on, you will put all of your statements and payment receipts for this particular account in this particular folder.
On the front of each folder, I want you to write with a big black marker the total amount of debt you currently owe on each card. Make the numbers big and bold so you can instantly see in black and white how big this particular debt is, and next to this figure write down today's date. Each time you make a payment that reduces this credit card debt, you will cross out the old total and below it write down the new, smaller total you owe.
In this way, you will automatically create a handwritten journal that keeps track of how your debt is shrinking. Just seeing a record-in your own handwriting-of the progress you are making each month is going to motivate you as never before.
In a few minutes, you are going to take this information about your credit card debt and start filling out the DOLP Worksheet on page 58. But for now I simply want you to do the simple arithmetic needed to complete the short credit card worksheet below.
FIGURE OUT HOW MANY CREDIT CARDS YOU HAVE
Number of credit cards I have: ______ Number of credit cards my spouse/partner has: ______ Number of credit cards my kids (or other dependents) have: ______ Total number of credit cards my whole family has: ______ The total amount of debt we carry on these credit cards is $______ The total monthly minimum payment due is $______ --- To figure out the totals, use the worksheet below. List each credit card account and its current outstanding balance, starting with the smallest debt and working down to the largest. In this way you will figure out exactly how much you owe and who you owe it to.
See the Debt Reality worksheet in the left sidebar.
NOW FIGURE OUT ALL YOUR OTHER DEBTS
Once you've filed all your credit card statements and added up your totals, it's time to add up all the other debt you have-mortgages, car loans, student loans, lines of credit, everything. To begin with, I want you to gather up all the statements for your mortgage and related debts, such as second (or third) mortgages and home equity loans. As you did before, create a file for each debt, label it (e.g., "Scotiabank home mortgage"), and on the front of the folder write the total amount you currently owe. Do the same for any car loans or other personal loans you may have. Finally, if you still owe money on a student loan, make a file and write the total current loan balance on the front of the folder.
Now add up all of this other debt and record it as follows.
--- I owe $______ on my primary mortgage.
I owe $______ on second mortgages/home equity loans, etc.
I owe $______ on second property/vacation homes or rental properties.
I owe $______ on student loans.
I owe $______ on car loans/boat loans.
I owe $______ on other installment debt.
The total amount of additional debt I carry is $______.
The Grand Total I owe as of ______ [today's date]is $______.
ADDING UP ALL OF YOUR DEBT ISN'T FUN- BUT IT IS HELPFUL
I'm not going to pretend that what I have just asked you to do won't hurt. Having coached literally thousands of people on this process, I can't tell you the number of times I have seen someone almost go into shock when he sees in black and white how much he really owes and to how many different banks and companies. For many people, completing this exercise is the first time they've ever taken a good look at how deep in debt they actually are.
I once went through this process with a couple on a television show, and they were stunned to discover that they owed nearly twice what they had "guesstimated." They went on the show thinking they had about $40,000 in debt. In fact, the total turned out to be $72,000. I'll never forget the look on their faces when I showed them the final figure.
It was not a pleasant experience for them. But here's the reality of the situation-you can't cure what you don't face.
The number-one mistake I see people making with their debt is what I call "debt denial." There's a dangerous attitude many of us have that can be summed up in the phrase: "If I don't see it, it's not real."
This is why so many people who are behind on debt payments don't even bother to open up the envelopes when their statements arrive in the mail. I'm sure this isn't you-but I am also willing to bet that you don't know exactly how much debt you currently have. Which is why this step, as simple as it is, is so critical.
DEBT FREE FOR LIFE SUCCESS STORY
David, I didn't really think it was possible. Getting out of debt is a bit like going on a diet. You try to get a handle on your fi nances, but you always slip back into old habits. It's been less than four years since I read The Automatic Millionaire, and I am proud to share that I am now DEBT FREE! I could not have done it without you. I bought the audio CDs to Start Late, Finish Rich and every time I got discouraged, I tossed a CD in the player and listened to it again and again. I have made so many fi nancial changes in my life, but the most startling was using your system to get out of debt. You see, I have been carrying the same old debt for almost 30 years (that's not an exaggeration) and I can't tell you how incredible it feels to be rid of it. Now, all of that money that was going to pay interest on "things gone by" is being used to go into savings. Thank you David! Pamela B.
LET'S ROLL UP OUR SLEEVES AND BE HONEST WITH OURSELVES
According to the Canadian Bankers Association, there are two credit cards in circulation for every man, woman, and child in Canada. More than a quarter of the people who hold those 68 million cards do not pay them off from one month to the next. Among those people, the average balance on their cards is $2,000. That's just the average. In my experience as a money coach for nearly two decades, I have seen firsthand that when it comes to credit cards many of us operate way, way above average. Both on Oprah's "Debt Diet" series and on the weekly "Money 911" segments I did for Today, I have met and worked with people who had run up $25,000, $50,000, $75,000-even more than $100,000-in credit card debt.
There's a classic twist on the old song that the Seven Dwarfs sang in Disney's Snow White: "I owe, I owe-it's off to work I go." It's a cute line, but is that really what you want? I don't think so. In fact, I know you don't. If you did, you wouldn't be reading this book. So let's roll up our sleeves, be honest with ourselves and deal once and for all with how much debt we really have.
Use the Debt Reality Worksheet to total everything up.
DOLPING YOUR WAY OUT OF DEBT
Now that your debt is organized and you have all of your records in front of you, it's time to fill out the DOLP Worksheet.
As I told you earlier, the DOLP system is the method I have taught for more than a decade to help people create an action plan that will get them out of debt. The process is simple, straightforward, and can be completed in less than an hour.
In fact, if you have already done all the chores I said you needed to do up to this point, then you are pretty much done with the bulk of the work involved in creating a DOLP plan.
All you really need to do now to get your "fast-pay plan" on paper is simply plug in your debt numbers.
The entire purpose of the DOLP plan is to build what I call debt-reduction momentum. In particular, it's about getting your credit card accounts paid down and "gone." By gone, I mean you have paid the cards off-and, ideally, have stopped carrying any debt on them. This is what I mean when I say you are going to DOLP your debts away-you are going to make sure your credit card and other loan accounts are Done on Last Payment.
(I don't mean you should close the accounts. As you will see in Chapter Seven when I discuss your credit score, you should probably keep them open to keep your credit score up.) So here's how you do it.
1. Fill out the DOLP Worksheet.
Your DOLP Worksheet will become the "scale" that you will use to track how much total debt all your various loans add up to-and in which order you should pay them off. You'll find both a blank worksheet and a sample worksheet on pages 58-59. In addition, there's an interactive version online at www.finishrich.com/dolp. Whichever one you use, filling it out is really easy. In the first column, you simply write in the name of the loan account. In the next column, you put the balance you owe, followed by the minimum payment due. The fourth column is for the payment due date. For the moment, hold off on filling this in. The last two columns are for the loan's DOLP Number and its DOLP Ranking. These two items are the heart of the DOLP system, and figuring them out (which we'll do next) is super easy.
See the DOLP sample worksheets in the left sidebar.
2. Calculate the DOLP Number for each account.
To figure out each account's DOLP number, you simply divide the outstanding balance by the minimum monthly payment.
For example, if you owe $500 on your Visa card and your minimum payment is $50, you take the $500 and divide it by $50, which gives your Visa account a DOLP number of 10. The 10 represents how many monthly minimum payments (not counting interest) it would take to pay off your debt. After you've finished calculating a DOLP Number for all of your credit card accounts, do the same for your other debts. Keep in mind that with most closed-end loans, such as home mortgages, student loans, or car loans, you can find the number of payments left listed on your statements. If it's not there, leave the space for the DOLP Number blank. We'll come back to them later.
3. Assign each account a DOLP Ranking.
This is even easier than calculating the DOLP Number. The account with the lowest DOLP Number is ranked #1, the account with the second lowest is ranked #2, and so on. The table above shows you an example of how this might look.
4. Calendar your due dates.
Now I want you to fill in the "payment due date" column in the worksheet for all of your loans, credit card and otherwise.
While you are at it, I also want you to add these due dates to whatever calendar system you use-whether it's on your computer (like Microsoft Outlook) or online (like Google Calendar) or on your desk (like an old-fashioned Day-at-a-Glance diary).
Regardless of the technology involved, set your calendar to remind you of all your payment due dates at least five days ahead of time. This should prevent you from making any late payments-and thus making your situation even worse by getting hit with costly late fees. You can protect yourself even more by signing up with your credit card companies to receive an email alert when your bill arrives in your online banking mailbox. Also, once you've got all your due dates written down right in front of you, it's really easy to figure out how you might rearrange them so they come at the most convenient time for you (whether that's all at once or bunched twice a month).
Most credit card companies and many other lenders will work with you to change their due dates for this very reason.
5. Fast-pay your debt-the DOLP way.
Now that your DOLP Worksheet is completely filled out, you're ready to start DOLPing your way out of debt. What the DOLP system does is tell you which of your loans you should pay off first in order to become debt-free as quickly as possible.
Here's what you do. Each month, you make the minimum payment on every credit card account you have . . . EXCEPT the one with the lowest DOLP Ranking. For that card, you make as big a payment as you can manage. Ideally, this payment should be at least double the minimum payment.
Using the examples in the sample worksheet on page 59, you would pay $65 to MasterCard, $35 to HBC, and at least $100 to Visa. Once a card has been paid off completely (you've DOLPed it-it's dead-hooray!), you bury it (which is to say you put it in a drawer, cut it up, etc.), and start attacking the account with the next lowest DOLP Ranking-in the example on page 59, the MasterCard.
THE DOLP SYSTEM: A PROVEN STRATEGY TO PAY DOWN DEBT
By creating a DOLP list of your debts, you now know which of your credit cards can and should be paid off fastest! The DOLP system works because it helps you quickly identify the card you can realistically pay off with the fewest payments. And once that card is paid off, you can put that much more toward paying off the card with the next-highest DOLP ranking. As each card is paid off, you have more money left to pay off your remaining cards. Seems easy, right? The truth is that the system is easy. It's simply a matter of prioritizing your debts and then fast-paying the right card down.
One question I am often asked is how much more than the minimum payment you should make to the card with the lowest DOLP Ranking. As I said earlier, I recommend paying at least twice the minimum payment-but more is always better because more means you will get the card paid off faster. And take it from me, if you haven't already experienced this yourself, there is nothing like the feeling you get when you check off a debt as paid in full. Hopefully, it won't be too long before you've got your #1 DOLP card paid off and you can start making extra payments on your #2 DOLP card. I have coached people who, in less than a year, were able to pay off more than a half-dozen credit card balances. Each time they retired a card, they celebrated (inexpensively).
That said, you shouldn't be under any illusions. DOLPing takes time, effort, and commitment. You've got to be realistic about this. It probably took you years to get into debt, so don't expect that you'll be able to get out of it in a few months. Several years is a more likely timeframe. But don't be discouraged. Your progress may be slower than you'd like, but with your newfound knowledge, a plan, and the will to take action, it will be steady.
WHY IT'S SO IMPORTANT TO REDUCE THE NUMBER OF CARDS YOU HAVE
The point of DOLPING your debt is to reduce the number of credit card balances you are carrying-fast. Using this method achieves this goal much faster than, say, focusing on the highest interest rate.
Reducing the number of different credit card debts you have is MISSION NUMBER ONE. Why? Because the more balances you carry, the greater the chance that you will be late on a payment or go over a credit limit-and get hit with huge penalty fees. Penalty fees are the bread and butter of the credit card industry. In many cases, credit card companies make more money from penalty and administrative fees than from interest charges. The fact is that a small card with even a small balance can cost you an absolute fortune. If you miss a payment on your "small card" with a $500 balance, the late fee could be as much as $50. If you keep using that card (and, again, you're not going to, right?) and you go over your credit limit, the penalty fee could be $100. Imagine-if you were late and went over the limit, the fee for the month would be $150! This is why, when it comes to getting out of debt fast, there are more important factors than interest rates. And, by the way, the credit card companies built their business on this exact premise.
DEBT FREE FOR LIFE ACTION STEPS
❏ Create a file system for all your credit card accounts.
❏ Use the Debt Reality Worksheet to figure out how much debt you have and who you owe it to.
❏ Fill out the DOLP Worksheet and use the information in it to prioritize your debts by DOLP Number or use the free online DOLP worksheet at www.finishrich.com/dolp
❏ Start fast-paying your debts the DOLP way.
Abridged excerpt from chapter five of Debt Free for Life published in Canada by Doubleday Canada, a division of Random House of Canada Limited. Copyright © 2010 David Bach. All rights reserved.