Sunday, March 06, 2016

Y$10K - Create a Program to Eliminate Debt

On your path to putting more money into savings, one of the biggest steps is getting out of debt. To be honest, these are not 100% related. You can go deeper into debt and but money into savings at the same time. You could borrow money and invest it. But I don't recommend that for obvious reasons. There's no point in building up a retirement account and then using the whole thing to pay down debt!

Here are five steps you can take to make real progress on paying down your debt. Before you get started, you need to decide what your goals are. For example, do you want to be 100% debt free? That means your house is paid off, you have no car debt, and you don't owe anyone else anything. Most people don't have that as a goal.

Most people want to be almost-debt free with just two big monthly payments: House/Rent plus a car. I think that's reasonable for most people. Personally, I love having my car paid off. So I get a five-year loan and try to pay it off in three years. Then I drive the car until it starts costing serious money to maintain. I generally spend about seven years with no car payment before I go do it again.

Whatever your goal regarding debt, write it down. You might even make a big sign and put it above your desk to remind yourself. That way, as you go about your day, you can glance up there and ask the question, "Does this action drive me closer to debt-free or further away?"

You need to spend money and you need to enjoy your life today because you don't know when it's over. But you also need to plan for the future. Here are my

Five Steps for Eliminating Debt

First Step: Take stock. How much do you owe and what are the interest rates? I highly recommend that you make an Excel Spreadsheet like the one pictured here. Tweak as you see fit. The goal is to simply get your arms around the problem. Once you know its size, you can handle it.

This might be a little overwhelming if you have had really bad money habits. Good! You should be overwhelmed and you should be shocked enough to take care of it. You should be shocked enough to take the next two steps.

Second Step: Create some kind of budget. For now just start with anything. Figure out where your money's going. Both personally and professionally, you should know where the "big chunks" of money go. I keep a fairly detailed spreadsheet for my business based on the reports from QuickBooks. I have "actual" expenditures for the months that have passed and "projected" expenditures for each month going forward.

You can keep it as simple as you want, but you need to do something. At an absolute minimum, you need to create a budget for payments that will be made toward your debt.

Third Step: Stop creating more debt. In other words, pay with cash/check/debit card and not credit card.

This is a really hard one for many people. Remember: You got INTO debt by using credit cards to make short-term loans to yourself and your business. And you paid back some of that, but not all of that. And then you did it again and again.

If your business needs periodic influxes of cash, you have a bad business model. 
Your business should NEVER need to borrow money from you. And it should pay you enough that you can live on. If it's not doing those things, you need to change your business model. You cannot lose money on a regular basis and make it up in volume!

I'm going to write a separate article about living off cash, but you can start right now. Put your credit cards in a filing cabinet and get them out of your wallet. Now, figure out how much money you have in the bank, and start moving all payments to your debit cards. Notice I made that plural: debit cards. Your business debit card should pay business expenses and your personal debit card should pay personal expenses.

I have been living and operating my businesses on debit cards/cash for more than eight years. In that time I have put only about $5,000 on credit cards. It might have been a bit above that, but it certainly wasn't $10,000.

I use my debit cards for all scheduled monthly payments (MAXFocus, JungleDisk, Intermedia, etc.) as well as airfares, hotels, rental cars, food, hardware, and so forth. Everything. The debit card has a VISA or MasterCard symbol, so it's taken everywhere.

Why pay cash/ATM? The answer is very simple: It forces you to stop paying for things unless you actually have the money. You want a toy quadracopter? Cool. When the money is actually in the bank, you can buy it. But don't put it on a credit card!

This means you will start paying bills strategically. When you have money, you'll make payments. When you have money, you'll buy hardware and software. (It's also a great motivator to getting your business paid in advance for everything. After all, you can't shell out $3,000 for new client desktop computers until you have the money in your bank, so you will have to get paid in advance.)

Fourth Step: Adjust all payments up a bit. See the example Excel spreadsheet #2. Just round up each payment to the next even $100 or $50 mark. This will result in a nice round number for your total payment allocation, which is $900/month in our example. You might make it even higher, but remember that we are always pushing forward on several fronts. I'd rather see you ALSO put an extra $100 a month into investments than to round up all the way to $1,000.

So round up a bit. If you have extra money, go ahead and put it in investment. The goal here is to COMMIT to the rounded-up number and use that as your debt-attacking number until the debt is gone.

Make this number a priority. Consider it just like the mortgage (It might include the mortgage). Never reduce it. Never miss it. That might mean that you need to eat dry Cheerios and Top Ramen for a few days before the first of the month. You'll live. After all, eating well played a role in getting you into debt, so eating lean should be a part of getting out.

Fifth Step: Accelerate one payment. In my example, I accelerated the payment with the smallest balance. Some people recommend accelerating the one with the highest interest rate. That saves you the most money, but takes longer. I like addressing the smallest debt because you can pay it off faster.

AND you don't change your total bill-paying allocation. You simply apply that whole amount to the next-lowest balance. As you can see, that will draw down that debt even faster. Continue this until all of the debts are gone.

You can also see the acceleration already. It's most obvious with the smaller debts. When payments get to be $500 or so, the credit cards begin to drop off pretty quickly. Stick to it! When you're debt free, you'll be putting $900 extra into investments every month!!! (Or whatever your debt-attacking number is.)

Now, here's what you don't do:

Do not take out another loan!

Do not take money out of your home equity.

Do not borrow from friends and family.

In other words - Do not try to get out of debt by practicing the habits that got you INTO debt.

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There are millions of web sites and blog posts on reducing debt. You might want to Google the subject and check out other strategies.

The strategy presented here is part of a bigger picture. You're still running your business, still leading your life, and still putting money into investments. You've simply isolated debt as a separate target to be tackled.

This strategy has the added bonus that you moved to paying cash for everything. So you won't be adding additional debts. That's great for saving and investing!

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For earlier posts in this series, just search for the label "Y$10K" in the cloud tag on the right.
Or click here:

Good luck!

Let me know how you're doing!


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