POWER PAY PLAN

Class Project 1 –

Power Pay Option

 

 

Complete the Power Pay process for yourself or a family member or a friend.  You do not need to disclose names or other identifying information.  The important thing is to use real numbers for a real person.  The project must be completed for a person having two or more debts – and do the Power Pay process on ALL of the debts this person has.  If you do not have 2 or more debts, you need to find a real person who is willing to share their information with you.  You must be using current, real debts.  You cannot complete the project with assumptions like, “I think I will have a mortgage of $250,000 and a car loan of $20,000 in 5 years.”

 

 

Your paper will be comprised of 3 sections:  the Power Pay plan, a discussion section, and a question section.  Please use headings to help organize your paper.

 

1. Section 1: Power Pay Process
   • Complete the Power Pay process, with a before and after amortization table for each loan.  Follow the steps outlined in these instructions closely, using accurate and complete numbers.  (Actually do the example below and make sure you know where all of the numbers come from.)  Discuss your thinking and reasoning, and the things you learned as you completed the Power Pay process.  Explain the numbers you used. Tell me your process; e.g., I did this, and found out this, and this was exciting because ____, etc.
2. Section 2: Discussion
   • Discuss relevant issues regarding consumer debt and the American economy.  You may reference articles from the reading packet (Section 3) if you need ideas or more information.
3. Section 3: Thought Questions
   • Address the following questions (with headings) for the person on whom the project is completed.  Use the question itself as the heading.  Major thought should be put in to each question, and your answers for each question should be a minimum of one paragraph (2-3 sentences).  If you are doing the project on yourself, answer the questions yourself; if you are doing the project on someone else, ask them and then answer the questions from their perspective.

• How will you come up with your payment accelerator?
• How do you plan on implementing and sticking to your Power Pay plan?
• How will eliminating debt affect your personal future?
• What impact will your debt elimination have on your immediate family?
• What impact will debt elimination in general have on society? (In other words, what impact would it have on society if the vast majority of Americans were debt-free?)

 

Project Grading Details:

• • Your grade will be based on (see rubric below)
    1. Accurate completion of the Power Pay plan and clarity of the explanation
    2. Thorough discussion of relevant issues to consumer debt
    3. Insightful answers to required thought questions
    4. Ability to follow all of the directions and include all of the relevant material
    5. Grammar = complete sentences, proper punctuation, no misspelled words, etc.

 

Formatting Requirements

1. Make sure your paper meets the following formatting requirements. If your paper does not meet these requirements it will be penalized.

• For paper identification, please follow the following format, placing the information in the upper left-hand corner:

	Name Course Number and Section Due Date   Title of Paper (Centered on page)

 

 

 

 

 

 

 

 

Example:

 

• Copy the following rubric on the bottom of the last page of your discussion (e.g., right after answering the questions and before you attach any supporting documents).

 

 

	/4 points for completing the process accurately and describing the creation of your project (Section 1)   /4 points for discussion section (Section 2)   /4 points for completely and thoroughly answering the questions (Section 3)   /2 points for correct grammar, including spelling, punctuation, flow of the paper, etc. and attaching supporting documents   /1 point for the “It” factor   /15 total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

• Projects should be typed, double spaced, in 10-12 point font with standard 1 inch margins.
• Length = 5-7 pages, typed, double-spaced; and then attach any relevant supporting materials.
• Use the formulas from your formula sheet to complete the project. Simply copy and paste the equations directly from the formula sheet, and then input your numbers for a clean and cohesive paper.  To input the numbers, double click on the formula box, and then click your cursor wherever you need to make changes.
  • If you have an old version of Word, you will not be able to edit the formula boxes and may not be able to copy the formulas at all; just make sure to keep everything neat.
• Do not use a cover sheet.
• Please note: If you want to protect your privacy, you may write your paper about your “friend” and pretend you are your friend.  You may even give yourself a fake name.  I will never know.  The important thing to me is that you are accurate for yourself, so that it is most helpful for you.

 

 

 

 

Power Pay Process

• Power Pay is a debt consolidation program guaranteed to get you debt-free in 10 years or less (that is, if you have “normal” debt/income ratios, and you follow the program as outlined).

1. Organize and list all debts in a chart (see example process below). Find the following information:

• Original amount borrowed (for closed-ended loans) or current balance (for open-ended loans)
• Monthly payment on loan
• Annual interest rate
• Original term on loan and months left on loan (for closed-ended loans)

2. Rank debts in order of highest interest rate first or lowest balance first.

• Paying off your highest interest rate loans first makes the most economic sense, but you may be more likely to stick with the program if you pay off your lowest balances first. Either approach is great.  The important thing is that you are going to be debt-free very soon!
• Always pay off loans with tax-deductible interest last, like your mortgage or your student loans.
• Play around with the order you pay off loans and see what is most beneficial in your situation.

3. Come up with a payment accelerator that is ideally 10% of your income

• This is extra money that will be applied to your debts every month. You will be paying your minimum payments AND an extra sum of money (to accelerate your payments).

4. Continue to pay all bills every month.
5. Apply the payment accelerator to the first debt.

• Put all of your payment accelerator on one debt at a time, and just pay the minimum payment to all other debts

6. Continue paying the first debt’s minimum payment and the payment accelerator until the first debt is paid off
7. Take the first debt payment amount and the payment accelerator, and apply it to the second debt until the second debt is paid off. Then roll everything you were paying to the second debt (first debt payment amount, payment accelerator, and second debt payment amount) to the third debt, etc.

• If one of your debts is paid off with minimum payments before you get to it in the payment accelerator process, add that payment to your payment accelerator for the debt you are accelerating.
• For example, let’s say you are paying on 3 debts, a credit card, a car loan, and a student loan. You are currently accelerating the credit card and paying minimum payments to the car loan and the student loan.  There are only 4 months left on your car loan, so you pay it off before you are done with your credit card.  Take the money you were paying to the car loan and increase your payment accelerator to the credit card in month 5.

8. Continue in the same manner until all debts are paid, and do not incur more debt during the time period.
9. After your debts are paid off, put your total debt payment amount into savings each month.

• You are already used to living without this money in your monthly spending plan, so use it to start investing!
• Use FVA to estimate the future value of your investment.
  • For PV, use the amount of your total debt payment in the Power Pay process
  • For r, use an interest rate you think you can earn on your investment
  • For n, use the total number of months you saved on the last debt you paid off early
    • Do not forget to use monthly compounding

 

 

Things to note:

• The total amount of money you are paying to debt remains constant throughout the process, even as you pay off loans

• This is the “snowball” effect, as one payment moves in to another and then in to another, etc.
• If you pay a total of $1000 (debt payments and payment accelerator) in the first month, you will still be paying a total of $1000 a month in the last month. The amounts don’t change; just the allocation of the payments between the debts.
• Follow through the example listed below to make sure you see how to utilize the numbers correctly.

• Loan information is available on your most recent bill or statement, or by calling your creditor.

• To complete this project, you must create loan amortization tables in either Excel or Quattro Pro.
  • Online amortization calculators do not work – you cannot access all of the information you need. Please download and use one of the amortization templates linked on the Assignments page on webCT.  The example below uses the Excel table.

• On the Excel table, you need to input the “Loan Amount,” “Annual Interest Rate,” “Loan Period in Years,” “Number of Payments Per Year,” and “Start Date of Loan.” The rest of the information will be calculated for you.
• On the Quattro Pro table, you need to input “Orig Amount,” “Orig Rate” as a decimal (like .07), “Term (yrs),” and “1^st PMT” as a date in this format: 6/1/85.  The rest of the information will be calculated for you.

1. • You need to do a loan amortization table for each debt.

• For closed-ended loans, like a car loan or a student loan, you must use loan origination information. In other words, you need to input the original amount borrowed, the original interest rate, the starting date of the loan, etc.
• For open-ended loans, like a credit card, use your current balance, the current month, and current interest rate information. You will need to play with the term in your loan amortization table until the payment is close to what you are currently charged. This will approximate fairly closely what will really happen.  For example, you may need to put in 3 or 4 or 7 in the “Loan Period in Years” column until the payment it generates is close to what your current minimum payment is.  One limitation of the tables is that you must use full years, like 3, and you cannot use partial years, like 3.5.  Just do the best you can and explain why you did what you did in your discussion.

• Once you have an amortization table for each debt, write down the cumulative interest paid over the life of the loan and the cumulative term of the loan.  Print out each table and label them “[Loan Name] Before.”
  • Please shrink your tables to fit on 1-2 pages in order to save paper.  If you have terms over 5 years, only print out the first and last pages and the page where your payment accelerator starts (if you can’t shrink it to 2 pages).

• Type in the payment accelerator to your 1^st debt directly in the column titled “Extra Payment” in Excel or “Extra Prin” in QuattroPro, starting in the current month (so this month, right now, today, not necessarily the first month of the loan).  Continue typing in your payment accelerator in future months in this column until the debt is paid off.
  • You cannot use the “Opt. Payment Box” at the top of the table in Excel.  You must type in the numbers in every cell in the Extra Payment column.  Of course, you can also copy and paste.
• Write down the cumulative interest paid and the cumulative term.  Print out your new table and label it “[Loan Name] After.”
  • Again, shrink your tables to print on 1-2 pages.
• Subtract the interest paid in the “After” table from the original interest paid in the “Before” table to see how much interest you saved.
• Subtract the months in the “Actual Number of Payments” box on the “After” table from the “Before” table to see how many months you saved.

• See what month it is when you pay off debt #1, and then put the total payment accelerator for debt #2 in the next month.
  • For example, if debt #1 is paid off in January 2009, the full payment accelerator for debt #2 should be added in February 2009, not on the first month or current month of debt #2.
  • So, you are paying a total of $300 to your loans every month.  If your total payment on Loan 1 with your accelerator is $225, and your last payment in January 2009 is for $50, you will have extra money ($225-50=$175) to apply to Loan 2 in January.  Then you will apply the entire $225 to debt #2 in February 2009.
    • This is perhaps the most important thing I check for when grading your project.  Do not do this part wrong or you will lose points.

 

 

	December 2008	January 2009	February 2009
Loan 1 Payment Amount	$225	$  50	$   0
Loan 2 Payment Amount	$  75	$250	$300
Total Paid Every Month	$300	$300	$300

 

• Again compare the cumulative interest paid before and after the payment accelerator to see how much you saved, and the actual number of payments to see how many months you saved.

• Continue this process for every debt, until all of the debts are repaid.
• Highlight or circle the cumulative interest, the total number of months, and the payment accelerator (where it starts and finishes) for each loan on the amortization tables, in both the “Before” and “After” tables.
• Create a summary chart highlighting all of the pertinent numbers.

• Try to duplicate the numbers in the example below to see how this process works.

 

Example of the Power Pay Process:

• Please note that I am using crazy dates; you will use the correct dates for the loan information you are working with.

1. • You have 2 loans with the following information, and it is currently 6/85:

• Visa – current balance = $2,500; interest rate = 21%; term = open (4 years)
• Car – original balance = $15,000; interest rate = 6%; original term = 5 years; began 1/25/84

• Here is a sample summary chart that you may use to organize your information (in other words, make a chart like this!):

	Minimum due June 1985	Amount paid June 1985	Amount paid April 1986	Amount paid May 1986		Interest Saved	Months Saved
Visa	$77.41	$277.41	$243.64	$0		$971.25	38
Car	$289.99	$289.99	$323.76	$567.40		$387.84	16
Total Monthly Output	$367.40	$567.40	$567.40	$567.40	Total Interest Saved	$1359.09
					Total Investment Value		$9,426.91
					Total Interest Saved + Investment		$10,786.00

 

• Below is the Visa Before amortization table from Excel.  You will input the $2,500 in the Loan Amount box, the 21 in the Annual Interest Rate box, the 4 in the Loan Period in Years box, the 12 in the Number of Payments Per Year box, and the 6/2/1985 in the Start Date of Loan Box.  Everything else is calculated for you.

 

• You decide that you can afford to add $200 a month as your payment accelerator.  Now add the payment accelerator of $200 a month directly in the column entitled “Extra payment.”  Because this is a credit card, you can start the payment accelerator in the next month that a payment is due (7/2/1985).

 

• Below is the Visa After table:

 

• Note that the last payment, in 4/2/1986, is for $243.64.

• Now you can calculate that you saved ($1,215.88 – $244.63) = $971.25 in interest and paid the loan off in 10 months, saving (48-10) = 38 months.  This information will go in your summary table.

• Now you can go the car amortization table.  Below is the Car Before table.

 

• You paid off the Visa on 4/2/86 with a payment of only $243.64.  So you will have ($277.41 – $243.64) = $33.77 available in 4/86 to apply to the car loan.  Starting in 5/86, you will apply the entire $277.41 as your payment accelerator.

 

• Here is the Car After table:

 

 

• Now you calculate that you saved ($2399.52 – $2011.68) = $387.84 in interest, and paid off your car loan 16 months early. This information will go in your summary table.

 

• You paid off the car 16 months early. Your debt payment was $567.40.  If you invest $567.40 a month for 16 months, earning an interest rate of 6% annually (with monthly compounding), you will have

 

• I chose 6% interest because you could probably find a high-yield money market fund for around that rate.
• Put this information in your summary table.

 

• Now add up the interest you saved by paying off your debts early ($1359.09) with the value of your investment ($9426.91) to find the total value of paying off your debts 16 months early is $10,786.
  • Put this information in your summary table.