Once you've gleaned together some cash (as much as you can, don't be put off if you cannot achieve this amount), you apply this to one debt at a time until you've paid that off. If you have credit card debts, you should reduce your payments to the minimum allowable payment as shown on the statement (usually somewhere between 3% and 5%) on all the cards except one, and use the “accelerator margin” money exclusively on one of the other cards until the debt is repaid. You focus on one debt at a time, preferably the one with the highest interest rate, rather than say, paying £50 a month extra on each debt.

If you can scrape together £150 a month as your accelerator. You would use this £150 to speed up repayment of debts by applying this to them one at a time. When you've paid off one debt, you take the payment you were making on that debt, plus this £150 accelerator and apply that to the next debt, i.e. snowballing the debt payoff. Some advise tackling the highest interest debt first but if all of your debts are of similar interest rates and you have some debts that are quite small then you could tackle the small debt first freeing up the repayments you were making on that loan to pay off the next loan.

For instance, lets say you have a visa debt that costs you £150 a month and a car loan, which is £250 a month. You take the £150 and apply it to the normal visa payment, thus making a £300 a month payment. Once the visa bill has disappeared, you take the £150 that you were paying and your £150 accelerator and apply that to the car loan, hence, your car payments are now £550 a month. The car loan will be paid off much sooner.



The advice is to list your debts and pay them off in the order of highest APR, e.g. pay off the 18.9% Visa debt before the 9.9% car loan. However if you had another debt that was costing £150 per month and you only had 2 more payments to make you could apply your accelerator to that debt and pay it off in one month and then use the saved repayment and your accelerator to add £300 to your visa card repayment making a monthly repayment of £450 a month.

Another example case study, if you have 2 credit cards, with, say, £1000 on one (visa) and £2000 on the other (mastercard), and both cards are 18.9%, and you have a £4000 car loan which is 11.9% APR and you have, say, a home improvement loan of £3000 at 8.9%. Lets say that both loans have been going for over a year, so the capital element has started to reduce as you make each monthly payment.

With the “snowballing system”, you are advised to tackle the highest APR debts. So, you continue to service your other debts at the minimum you can (car loans, HP and such usually have fixed payments, so you cannot drop those, but with the credit cards, you can reduce your payment to the minimum shown on the statement).

In the example above, you would tackle the 2 credit cards first, then the car loan and finally the home improvement loan. You would take your accelerator of £100 from above and apply that to one of the credit cards, whilst lowing the other one to minimum payment. We'll tackle the visa debt first (it's smaller and would therefore be paid off quicker than the mastercard and you would have 'victory' over one of the debts much sooner – a great morale boost).

With this additional £100 payment to the visa card, the balance will be paid off sooner. Lets say this visa's minimum payment was £50 a month (5% of £1000) – you would therefore pay £150 a month.

Once that card is paid off, you take the £150 that you were paying and apply that to the next debt, which in the example above, is the mastercard debt. This has had a 5% minimum payment too, which would be £100 per month. Now you add them together and you have £250 a month to apply to that debt.

As you can see – a snowball effect, as the debt repayment is growing – much like a snowball rolling downhill.

Once the mastercard is paid off, you then take the £250 that you were paying and apply that to the next debt, which would be the £4000 car loan. Lets say the car loan payment is £150 a month. You add that together and you start to pay £400 a month to the car loan.

Once that's gone – you now have a £400 a month snowball, which you apply to the last debt, which is the home improvement loan. Lets say you're paying £120 a month on that – now you can pay off £520 a month until it's gone.

Once that's gone – you're debt free. (except for the mortgage of course).

(note : all monthly figures above are just rough estimates used purely to illustrate the point)

Once you've paid off the “debts”, the programme says that you should take your last “accelerator”, which in the above examples, would be £520 a month, and apply that to your mortgage. As you are overpaying your mortgage, you are reducing the capital element each month (the amount you owe) and therefore the interest charged on the capital element will be less so the amount you are paying will be paying more off the capital instead ot interest and so speeding up repayment. Depending on how long you've had the mortgage, it claims that this can be paid off in full within the next 4-5 years in most cases.



Let's just look at an example :

Suppose your mortgage is £150,000 and your repayments are £1000 per month interest only and you have 18 years left on your mortgage. If you increased payments to £1500 per month after one month you will have paid the £1000 interest only and £500 off the capital. So now you only owe £149,500 so the interest on this is not £1000 but £996.67. The following month you will pay £996.67 interest and £503.33 off the capital. You now owe £148996.67 and the interest payment is £993.31 so the following month you will pay £506.69 off the capital which is now £148489.98.  The following 4 months go like this

Capital           Interest      Payment     Paid off capital
£148489.98    £989.93     £1500          £510.07
£147989.91    £986.59     £1500          £513.40
£147476.51    £983.18     £1500          £516.82
£146959.69    £979.73     £1500          £520.27

As you will see the amount paid off the capital increases each month and that the amount that it increases by also increases from £500 the first month, £503.33 the second, £506.69 the third, £510.07 the forth etc.  After one year you have paid around £6200 off the capital.  After 2 years you have paid approx. another £6770 off the capital.  After year 3 you will have paid another £7400 off the capital. So you can see that the amount you are paying off the capital is increasing each year.  For a mortgage of this size with this mount of starting accelerator it would take more than 5-7 years to pay off that mortgage.

Once all your debts are paid off, including the mortgage, you start to invest the money that you were paying on the mortgage, e.g. the regular payment + the £520 accelerator, and start investing it for your retirement. In the $100,000 mortgage example, where the regular payment was £1000, you would have been applying $1520 a month onto the mortgage. Once the mortgage has gone, you should start to invest the $1520 a month to build up your retirement fund.


To reiterate:
1. Practice Live Below Your Means ( LBYM ) and get together some cash.
2. Stop saving money in banks and pensions.
3. Reduce all your credit card payments to minimum.
4. Take the money from steps 1,2 and 3 and call this your “accelerator margin”. Aim for 10% of net income.
5. Apply this to one debt at a time – prioritise by dividing the monthly payment into the balances.
6. Once one debt has been eliminated, roll up the margin from step 4 plus the payment you were making on the previous debt and apply to the next debt on the priority list.
7. Continue with this until all debts, including the mortgage, are paid off. Timescale typically 7-10 years.
8. Take the money you were paying on the mortgage and save into an emergency cash fund (typically want 6 months worth of living expenses in some easy access savings account).
9. Once the emergency fund has been built up, start investing the money for retirement.
10. Retire in as little as 12 years and have a comfortable income and enjoy the simple stress-free life.