Wilma reviews the basic types of the extra fuel version of the debt destruction engine. She and Ted will run a type I extra fuel version of the debt destruction engine to destroy 8 accounts: 4 credit cards, 2 store revolving accounts, and 2 finance company accounts. (See my previous articles to see how to set this up and get it running.) She fires up the boiler on her debt-annihilating locomotive. It is slow at first and takes a while to destroy Bill 1, but keeps building momentum and eventually obliterates Bill 2 and then Bill 3. As it starts tearing into Bill 4, everything, at first, is chugging along smoothly.
Then right about here, when Wilma is in the middle of destroying Bill 4, something goes wrong. Yes, things can go wrong with this strategy, just as things can go wrong with anything else. So many financial disasters hit all at once, that the emergency fund is overwhelmed. If they had been operating the way they do now for the last 10 years, they would have a large enough emergency fund to deal with any contingency. For 4 out of 5 people who operate a debt destruction engine, the new emergency fund will not be overwhelmed.
Wilma is one of the "lucky" 1 out of 5 for whom this is not true. She has a pretty good idea of what to do, but has another problem. Ted, her "Clyde," wants to quit. He wants to chuck the whole thing and go back to the prairie chicken life of credit cards and mere survival. "I told you this wouldn't work!" yells Ted. Wilma wonders if she should have put the whole $480 a month into the emergency fund at the beginning. Wilma realizes, though, that it is too late now to cry over spilt locomotive fuel.
(Back when Wilma started this process, she found $505 a month "hiding" in her everyday life. She applied $25 per month as extra fuel to the debt destruction engine. This left $480 a month. She put part of it each month in her 401(k), part in Ted's 401(k), and part in the new emergency fund. Many financial planners recommend that you build up the emergency fund first before doing anything else. The emergency fund should, according to conventional financial planning wisdom, equal at least the amount of your salary for 6 months or even as much as 8 months. This could take a long time, a year or 2 years or more, but it is something to think about and is, of course, a strategy decision that is entirely up to you.)
Wilma calls me and tells me about the crisis. "I believe I can get through this if my 'Clyde' doesn't throw in the towel." I tell her that I have an idea about something that might help, but I can't tell her what it is. After I hang up the phone, I call the 'Em Brothers. I have heard that the 'Em Brothers have started a new company called CAC Inc. The letters "C - A - C" stand for Clyde Attitude Correction. They would normally charge $2,000 for this service, but agree to help Wilma for free as a way of advertising their new business.
The 'Em Brothers capture Ted, blindfold him, and bring him back to their office. Ted is handcuffed to a chair in a dark room. The blindfold is removed and Ted is left alone.
Then the lights come on and suddenly, the first brother, Rock 'Em, bursts into the room. "Thank you, thank very much! Thank you, thank you, thank you very much!"
Ted screams, "An Elvis impersonator? Oh, God, save me! Sweet Jesus, help me!"
To say that Rock 'Em filled out his Elvis costume would be an understatement. Rock 'Em had once dove into a swimming pool and the concrete splashed out.
After 3 hours of Rock 'Em's rock and roll "singing" of 86 renditions of "Don't Be Cruel," Ted is sobbing uncontrollably.
Then when "Elvis" has left the building, the second brother, Sock 'Em, waddles into the room wearing a purple Barney suit. Sock 'Em loads a video in the DVD player, a Sesame Street collage, that extols the virtue of cooperation for 3 hours as "Barney" goes round and round Ted whacking him in the head with a giant dirty sock once worn by Mr. Snuffelufagus.
"Mommy! Mommy! Mommy!" cries Ted, shaking hysterically.
"Barney" leaves and then the third brother, Shock 'Em, charges into the room wearing a giant Energizer Bunny costume. A long arc of electricity crackles from him extending to the head of Ted every time the Energizer Bunny says the words "not going." Shock 'Em says, "So, your wife asked you to continue with her in this new path, but you said your not going not going not going not going not going not going not going not going not going not going not going not going not going not going not going not going not going not going not going................................"
For 3 hours, the words "not going" are repeated 27,000 times and Ted is jolted with a shot of stun gun electricity 27,000 times until he looks like Kramer from Seinfeld with his big toe in a light socket!
Ted, formerly Wilma's "Clyde" the rebellious, is now a crispy critter of compliance. After being returned home, he sits staring into space saying, "Yes, dear" in answer to every question and sometimes when no question has been asked.
Now that the problem of Ted's resistance has mysteriously disappeared, Wilma is free to once again contemplate her problem. In the midst of attacking Bill 4, the emergency fund has been overwhelmed and they do not have the money to deal with everything that has gone wrong.
Wilma tries to get a bank loan. She intends to just plug it into the debt destruction engine. She knows this will increase the length of time required to destroy the debt, but is patient and determined to not give up on her dream of debt freedom. She finds that she, however, cannot get a bank loan. It has not been long enough since the bad credit record days of their past. The bad credit history of the past will haunt them a little longer before they are free of it.
She can, though, use a credit card to get the resources to survive the present crisis. (Yes, she can get another credit card, even though she cannot get a bank loan.) She hates doing it, but does. She continues putting money in the emergency fund in the same way she has since she started out and she continues the debt destruction engine. She plugs the new debt into the debt destruction engine. It now takes 6 years and 1 month to kill the Type I debt instead of the 4 years and 10 months that it would have taken if the overload of the emergency fund had not occurred.
When you operate your debt destruction engine, it may take longer to annihilate your debt than you originally planned. Things may go wrong that require more than the emergency cash you have on hand. These things might occur before you have had a chance to build up the cash to deal with them in your emergency fund. You may have to go back into the prairie chicken world and use credit to deal with these problems. If this happens, just plug this new debt into your debt destruction engine. It may add an extra year or so to the process.
And there is no guarantee of success. The first time I ran a debt destruction engine, the locomotive jumped off the track after 21/2 years. I had made the mistake of driving 2 cars that were too old, 14 and 15 years old. These machines kept breaking down, which depleted our emergency fund down to nothing. Then, at the exact same moment, they both broke down again and both required new engines. We could not get a bank loan or a credit union loan because, like Wilma and Ted, our credit was not yet good enough.
I could have and probably should have gotten a credit card like Wilma did and had an engine installed in one of the cars. (Yes, we could have gotten a credit card. They hand out these things like Halloween candy to people with marginal credit.) We had never used credit cards up to that point. Our debt consisted of store revolving accounts, finance company accounts, credit union loans for cash and for a car, and the mortgage. At the time, I was adverse to the idea of using credit cards and I thought we could not qualify for one. The point here is simply that you do whatever you have to do, even if it is a "prairie chicken thing" like using credit cards. If you have to break the usual rules in order to win, you do it.
We had to borrow the money from a high-risk lender to buy a car. I detest buying a car the conventional way from a dealership. If you calculate the lifelong impact of the payments you make in terms of what these payments would grow into if put into an investment stream, you will see that an amazing amount of wealth is destroyed while you drive your new car.
In your 20's, over 5 million dollars disappears from your wealth at age 70 when you pay car payments instead of investing the car payment money.
In your 30's, over 1 1/2 million dollars is vaporized from the elder version of you at age 70.
In your 40's, at least 1/2 million dollars is kept from the grandma or grandpa version of yourself at age 70.
In your 50's, you deprive your 70 year-old self of "only" $100,000. You do not want the elder You to hate the younger You, do you? Have you been robbing a senior citizen, yourself?
We do a U-turn now on Digression Lane and drive back to the story of Wilma and Ted. So, they have done it! They have destroyed their Type 1 debt. They still have the car loans: one with a finance company and one with a bank. They still have the mortgage, but they are free of the credit cards, the smaller finance company accounts, and the store revolving accounts.
After 6 years of raises, their pre-tax deposits into 401(k)'s and IRA's are at the maximum level now. (See page 111 of "The Debt Destruction Engine", available for free by request at website indicated below, for a discussion of the "Walk Up" strategy for increasing contributions to the 401(k) and to the IRA.) Now they look into self-directed retirement accounts. When you have maxed your contributions to the 401(k) and to the IRA, you are permitted to contribute to self-directed retirement accounts and enjoy tax-free growth. The rules and limits change on this from time to time. You can go to the library or search the Internet to find out about this when you are ready to look into it.
After Wilma sets up their contributions into self-directed retirement accounts, she arranges for the remainder of the money that was going to bills to be automatically deposited into mutual funds. These funds are not pre-tax accounts, but are for saving for long-range purposes, vacations, and big-ticket purchases. To recap then, part of the previous bill money is used for self-directed retirement accounts and part is invested by automatic deposit into after-tax mutual funds. Of course, the amount of money fed each month into the emergency fund is adjusted up and down as circumstances change through the years.
Then Wilma and the now compliant Ted (thanks to Rock 'Em, Sock 'Em, and Shock 'Em) go to see a Certified Financial Planner. They should have gone years ago, but there was the matter of Ted's former resistance and just general procrastination. The CFP helps them fine-tune their financial plan. They and the CFP staff create a plan which helps them prepare for the children's college expenses; save for vacations and other major expenses; prepare for all possible contingencies such as disability, possible nursing home care, possible long hospital care, and death; and prepare for retirement.
The CFP advises them on the importance of having a will and refers them to an attorney who will help them write this document. She advises them as to whether or not they should set up a living trust. The CFP helps them set up their financial affairs so as to reduce taxes: income taxes in this life and the taxes that need to be avoided after death. She helps them arrange to have their assets conveyed to their heirs after their deaths, without being reduced by probate and other taxes. The CFP and her staff advise them on asset protection strategies and liability issues. There are a great many people who lose a large part of their assets through lawsuits. She helps them protect themselves from these liability dangers.
As Wilma and Ted head home after seeing the CFP and the attorney, they can hardly believe the way their lives have changed. As they drive home, Wilma says, "I started paying in extra amounts on the car payments to pay these loans off early. With the money we are saving now, we will soon be able to pay cash for our cars, if we want to. All that money going to car payments can be invested and grow and we can just pay cash for what we want to do or buy. And then we could pay an extra amount every month on the house and wipe out the mortgage in, oh, 5 to 10 years, if we want to just kind of take it easy. Imagine the thrill of then having all that house payment money each month to invest. We will really get ahead of the game then!" And to think, they owe it all to Rock 'Em, Sock 'Em, Shock 'Em, and the Debt Destruction Engine.
"Yes, dear" says Ted.
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