Latte Debt Sharing

One of my friends in my church family shared an idea recently about giving up buying stuff for Lent. You can read about that here. It came as confirmation to an idea God had been running through my head during Christmas about helping each other get out of debt. The Latte in the title is a nod to the author of the automatic millionaire . In the book he popularized the idea of not buying your gourmet coffee every morning and using hat money about 5 bucks a day to invest in your future. Since a savings account will get 3% on a good day and debt is usually in the 12-24% range I figure paying down your debt is generally a better investment then the stock market.

It's about giving to each other.

The general concept of Latte Debt Sharing is one person is chosen to have one particular debt paid off. The rest of the group and that person pay their latte factor toward paying off the debt. When the debt is paid off, the person who got their debt paid, pays their original payment plus their Latte factor into the next person’s debt. They are morally but not legally obligated to continue paying their original payment into the next person’s debt at least until they have returned what they have been given. They pay it forward.

The goal is to release people from the bondage of debt; not to enslave them to a new debt. That is why the requirement of the original person to pay the next person’s debt is a moral obligation and not a legal obligation. We don’t want to trade one form of slavery for another. But we do want people to be honest with the heart of serving the group.

To be frank, the idea has ample room for people to abuse the system. It is up to each individual to police themselves with one minor exception that we’ll talk about Latter. If people come to this thinking they are going to cash in, the group will quickly disintegrate anyway.

There are numerous conditions and criteria that I will begin to address here, starting with debt selection. But this is not a legal contract. It is a general understanding that can be customized for the unique circumstances of each group.

Debt Selection:

A debt is a single legal obligation that one person or family has in the group. For example: a car payment would be one debt. A first and second mortgage would be considered two debts. First the founding members of the group agree to debt sharing. At the organizational meeting, the rules are explained, spelled out and agreed to.

The next job of the founders is to select the debt that will be paid off first. Each founder (or founding family) brings with them a statement that represents their single smallest debt. I recommend that credit cards and gambling loans be excluded. Credit cards when used for personal purchases often represent a failure to plan for emergencies or a lack of discipline.

It is worth saying here that this is not a program to help people who are near bankruptcy. It is not a benevolence fund. This is to help generally healthy (financially) people get out of the bondage of debt. People who can’t afford to pay their bills are beyond the scope of this idea and should not be allowed to participate. For that reason the debt must also be current. The bill should not say past due on it for example.

No debt should represent something that the group morally objects to like a gambling debt or a tab at the local pub. Business debts should also be excluded because those debts are entered into for the purpose of making money and are really beyond the scope of this idea.

For the rare occasion that someone wishes to participate who is debt free, special circumstance should prevail. I would suggest that a financial goal should be established by that person such as establish X dollars for a college fund, down payment on a house or retirement. Then that person would define what amount they will pay into that on a monthly basis. (The monthly payment becomes important Latter.) Then submit that to the group as their debt when the time comes.

At the founders meeting where the first debt is chosen the group finds out who has the debt (or financial goal) that represents the smallest amount. The smallest amount is chosen for several reasons. The first is risk. A smaller debt is less risky to start off with. If things go badly walking away is much easier to do. It should be stated that no one is under any legal obligation to continue for any length of time. So just because person A starts paying on person B’s debt, person A is under no obligation to continue.

Another reason it is best to start with the smallest single debt is it will get paid off the fastest. This allows the next person to receive the benefit of the debt sharing sooner. This is just more fair to everyone involved. Paying of a debt of any debt is a big event and should be celebrated by the members. The celebration is the reward. The celebration will positively reinforce the group effort. Every month people will look forward to the meetings.

Some might argue the debt with the highest interest rate should be paid first. In my experience humans are very emotional creatures. Our emotions demand positive reinforcement early and often. Starting with the smallest debt may not be the best move from a strictly interest rate perspective. It is the best move from the perspective of having a strong program that the members are excited about doing.

Every founding member or founding family is eligible for the first round of debt selection with the exception of the organizer. The organizer is exempt from the first round to preclude any appearance of self interest.

So that is the first debt selection. The smallest single debt that is morally agreeable from anyone in the group with the exception of the organizer. I’ll deal with future debt selections Latter on.

What is your Latte Factor

Before the organizational meeting, each person or family should determine what they are willing to contribute to someone else’s debt. This number should be something that can fit in the monthly budget and represents extra money. If there is not extra money then the person should not participate. This amount is called the Latte Factor.

Each person’s Latte factor is private and there is no need to discuss it with each other. It is expected that it may vary from month to month. But under normal circumstances as people get better at handling their finances this number should increase. If someone loses a job or some other event takes place that causes them to have a smaller Latte Factor no one will really know because it is held private.

How the Bill get’s paid.

When a debt is selected, the bill or statement of the debt is passed around for everyone to view. Everyone should take note of the normal monthly payment that is to be made on the bill. That payment is still the obligation of the debtor. The debtor is also obligated to pay over that amount according to what they would have paid if it was someone else’s debt that would have been chosen, the Latte Factor.

Each person records the account number and payment address of debt and makes a payment right away. The preference is that payments would be written out and mailed the same night. So bring your checkbook, an envelope (your own to keep things anonymous and private) and a stamp.

The following month, the debtor who’s debt is being paid by the group brings a statement to the group for review. Either they or someone who isn’t afraid of public speaking goes over the statement with the group. The statement should show the debtor’s payment including their Latte Factor and one payment for every other member of the group. This should be a time of celebration. If everyone played fair, you will have made a significant dent in this debt for the cost of a cup of coffee!

So what happens if not everyone pays or if a check bounces? Well this is the big risk isn’t it? If it is the debtor who hasn’t paid, then his or her debt becomes ineligible for the next month. If the bill can be brought current then everything can go back to normal. If in two months the debt is not brought current, a new debt should be chosen. Obviously this can be very embarrassing. So each person should carefully consider if they are financially able to participate in the program before starting. Like I stated earlier this is not a benevolence fund.

Now if then number of payments does not match the number of participates and the short is not the debtor, then an effort should be made to determine if someone was Latte or if they were not able to make the extra payment. If they were Latte it’s not big deal. They’re payment and next month’s payment will show up on the next statement. If they were unable to make a payment, then they need to reconsider if they are financially able to participate in the program. A payment can be as low as a dollar. So someone who can’t make a payment should withdraw and seek financial counseling.

Over time it will become a habit. We all bring our checkbooks and an envelope to the meeting because it’s the debt sharing meeting. It can be a time of celebration every time as people see real change in their debt and long term financial well being. Even if it’s not your debt being paid you can be happy that your brother/sister is better off because of the contribution that each member made.

The Next Debt

When a debt is paid off, you really need to celebrate. Not anything too expensive. Perhaps someone in the group buys a cake that says debt free on it or something. It needs to be just a little something to remind everyone of were we are all headed.

Part of the celebration is choosing the next debt. The organizer is now eligible to participate. However the member whose debt was just paid is in eligible this round. In fairness if you just got one debt paid, it’s time to let someone else have a shot. The same criteria are used as before, the smallest morally acceptable debt.

The process of payment continues with one exception. The member whose debt was retired is now morally obligated to pay not only their Latte Factor into the next member’s debt but also their original payment. You can see how this could snowball into some very large numbers.

For example, let’s say the original debt is $1,000, the original payment is $3.20 per month, there are 5 members total and the average Latte Factor is $13 per month. So the debtor is required to pay the $33.20 they would normally pay plus the $13 Latte Factor, that’s $46.20 from the debtor. The other four members will also pay their Latte Factor of $13 on average. That’s 4X$13=$52 from the other 4 members and $46.20 from the debtor for a total of $98.20. Assuming 12% interest the debt would be paid in 11 months.



The same debt would have taken 3 years if the debtor only made the required payment.


Note every member’s Latte Factor will be different. And since the program is about giving more than it is about getting, we shouldn’t put too much emphasis on who is giving how much. If there is too big a difference say one person is able to give $1000 and everyone else is around $10, the big spender should probably tone it down a bit for the health of the program.

So how long should the member whose debt was paid continue to make the larger payment into the next person’s debt? Ultimately this is up to each individual member. I like to say the member is morally obligated to continue paying as much money as they have received from the group. But this is a program about giving. The member whose debt was paid in reality has a new Latte Factor that is much larger than it was before. So they may wish to continue to give above and beyond what they have received. Eventually if everyone stays with the program long enough it will come back to them.

One final note about new members: A successful program will surely attract interest from outsiders. But to prevent abuse it’s recommended that a new member be ineligible to have a debt paid until they have participated through one full cycle start to finish of paying off someone else’s debt first. This means if they join ½ way through one member’s debt, they will not be eligible in the next debt selection.

May God Bless your finances.

-John