How To Use The Power Down Method To Eliminate Debt

I have been getting lots of questions about my previous post on budgeting. Most people have asked me to write more about the “Power down approach for eliminating debt”.

Today we will therefore be looking at how to apply the “Power down” technique by giving practical examples

The power down technique is a method of eliminating debt through a systematic approach that accelerates your ability to get out of debt.

This is how it works: 
1. Rank your debts (from either highest to lowest interest rate, shortest to longest maturity, or lowest to highest balance). It’s up to you which way you want to rank them. But I ranked mine highest to lowest interest rate. 

2. Once you have determined which way you want to rank your debts and they are in a list, work to entirely pay off the first debt in your priority list. Here are some examples on how you can save money and use it towards paying off the first debt:

DO NOT buy things you don't need. For a few months, buy only necessities, by coming up with strategies of saving on a daily basis. For me I have stopped buying “take – aways” during lunch at work, instead I carry a lunch box from home. The money you will save by bringing your own lunch to work will make a huge difference. Let’s say you spend R30 per day for lunch, multiply that by 5 (5 days in a week) then multiply that by 4 (4 weeks in a month) the answer is R600. That is the minimum amount you could save if you carry lunch from home. Since January, I told myself that this year I am not buying new clothes even if they are on sale. If you really need to buy a new clothing item take advantage of clearance sales.

Tip: If you need clothes for summer buy them in winter and vice versa and unsubscribed from daily deal emails to avoid temptation.

Shop smarter at the grocery store. Name brand products are good, but store brand products are often just as good (if not identical). Make the switch to the bargain labels, and you'll shave 25-50 percent off of your monthly grocery bill. With more and more grocery chains launching their own line of organic and other premium products, there's never been an easier time to switch. You can buy these store brands until you have settled all your debts.

Tip: Remember to always use a shopping list.

Drive less, cycle or walk more. Use a bike or walk to your local store. Not only will you save on petrol but you will get more exercise too.

Don’t say no to everything. The plan is not to deprive yourself of things that make you happy. Don’t cut out completely on entertainment, but choose to spend your money wisely on those things. “Economical living isn’t about waiting for things; it's about spending less on the things that don’t really matter to you so you can spend more money and time on the things that do matter”

Therefore all the money saved from doing what is listed above must be added each month on the first debt monthly re-payment amount until it is paid off.

3. Once the highest ranked debt is paid off, you then apply that debt’s payment amount to the next obligation on your list.

4. As you work through your list of debts you must take the same amount you used to pay off the previous debt and put it towards your next debt payment. This will allow you to rapidly pay off your loans by gradually increasing the amount available to paying it off.

What’s so wonderful about this method is that it allows you to get out of debt (including a 20-year mortgage) in about one-third the time it would normally take. This means you could be out of debt completely in 10 years or less.

Tip: If you are in property investments, you should not worry yourself too much about paying off your 5 mortgages in 10 years. 

To understand how the Power Down method works, let’s use “Andile” as an example. Take a look at his “Get out of Debt” Report.

Andile prioritized by putting the debts that could be paid off in the quickest time at the top of his list. You will notice on the report that the first debt listed is a credit card. He began working to pay off the Credit card by paying a R549 monthly payment and added an extra amount form savings using the techniques discussed in point 2 above. When the first debt was paid off, instead of using that R549 he has been paying to the credit card on other needs and wants, he began applying it to the second bill on his list (Personal loan). By applying the R549 to the R620 personal loan payment he was able to pay off this second debt earlier than the agreed period. He continued this process, adding the combined amounts from each of the previous paid-off debts to the next prioritized debt. By using this technique he was able to be completely debt-free in 5 years, which is less than it would have taken him had he not not used the Powered Down Technique.

Now in order for you to stay on track with this plan and remain enthused about it, you will also need to create the Debt Plan (similar to Andile’s) that will allow you to see the value of Powering Down so you will be motivated to stick with the plan.

With South Africa’s credit rating just downgraded to junk status by S&P, it is clear that interest rates are going up and therefore cost of debt is going to increase, therefore the sooner one pays off his/her debts the better.

Just a short summary of what this junk status means: “A downgrade to non-investment grade (junk status) means a country has a higher risk of being unable to honour its debt commitments. As a result, investors require higher compensation for the risk taken, expressed in a risk premium. Junk status means investors have to reassess the risk premiums required when making equity valuations and bond pricing, and premiums paid on insurance against default”.

I know that this definition might be a bit confusing, but what this basically means is that the downgrade could in the longer term lead to higher interest rates‚ making it harder for people to pay for vehicles, home loans and other obligations. 

These are really tough times for the South African economy, I would advise that we spend wisely; pay off our obligations as soon as possible using strategies discussed above and find ways to generate extra income.

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”
-Adam Smith