Apply every extra dollar each month after necessities toward paying off debt using the debt snowball. Once you have figured out a budget and have raised your beginner emergency fund the next step toward gaining financial freedom is to eliminate debt. Simply put, debt robs you of your financial freedom and will never allow you to build wealth.
What is Debt?
We all know what debt is, but we typically think of it in very simple terms. Credit is used for a variety of different reasons, but it does not change the fact that when we go into debt we are actually entering into a state of financial servitude. If you are currently in debt think about how differently your life would look right now if you did not have any payments. If you didn’t have any payments would your basic needs be provided for fairly easily?
I am not casting judgement upon anyone, so please don’t hear that because I’ve been there. As a society we take debt too lightly. We don’t think about the future enough to realize that if we change our habits and live on less than what we make right now that we will be better off in the future. The reality is that when we take on debt it causes us to live on less than we did previously. Debt masquerades as a tool or a help for the moment, but it quickly becomes a burden and we need to change our thinking.
A Change in Thinking
It wasn’t until someone showed me a different way that I was able to change my thinking about finances. I’m sure that most of us know that debt is not good, but it’s normal so it’s accepted. I was sick of being normal and was ready to make a change. Debt may be normal, but it does not have to be. Going through life asking about how much the payment will be might be normal, but there is a better way. If you’re ready to change your thinking you could become debt free too.
If you have already sat down and figured out a budget and raised a beginner emergency fund then you are well on your way to getting out of debt. You have already started to change your thinking. Now it’s time to get even more aggressive. Start dreaming about what your future could look like if you were not giving all your money to the money lenders. Start dreaming about how your older years could look if you were able to start saving some money. Dream about the things you will be able to do versus the things that you will have to do because of a lack of choice. Get angry at your debts and get rid of them as quickly as possible.
Paying of Debt
At this point you have laid the ground work and it is time to get busy. If you did your every dollar budget correctly and cut your wants to a minimum you should have money left over in your budget to start paying down your debt. You may even get so serious about making a change that you decide to get another job and make some huge sacrifices. The more you sacrifice now, the quicker you will be come debt free!
To start paying off your debt you should list your debts from largest to smallest like I showed you in your sample budget. Keep track of how much you owe on each and know what you minimum payments are on each. With your debts listed out from largest to smallest you are going to pay the minimum amount on each debt except for your smallest debt. Once you have made your minimum payment on each of your debts you will apply all of your remaining money toward the smallest debt. In the budget example below you will see that the extra money was going to building the beginner emergency fund. Since you should already have your $1,000 saved you should start applying your extra money to your smallest debt.
Pay the Premium
When you are paying off your debts make sure that you pay your minimum each month and any extra money that you are paying toward that debt is going toward the premium. Do not make extra payments! Paying on the premium lowers the amount that you owe. Making extra payments causes you to pay extra interest that you do not need to pay. The goal is to pay your debt off as fast as possible with as little money as possible. You do not want to pay extra interest so remember that anything above your minimum payment goes to the premium. Do NOT make EXTRA PAYMENTS!
Get the Debt Snowball Rolling
Once you get your smallest debt paid off you will start gaining traction in reducing your indebtedness. When the smallest debt is paid off you have more to pay on your next smallest debt. Once you get the next one paid off you will have even more to apply to the next smallest. Before you know it your snowball is rolling faster and faster and the debt will melt away. Your intense focus and tenacity at paying it off as fast as possible will give you energy.
The ability to get out of debt is within you. The speed at which you get you snowball rolling will depend on how aggressive you get. Selling things, cutting down on unnecessary spending, getting another job, etc. will help you get out of debt faster. Determine in your mind how aggressive you will get. The more aggressive and determined you are now will have a huge impact on whether or not you stay out of debt. If you make some huge sacrifices right now for a short period of time you will remember what debt cost you and you will not want to go back.
What about the Mortgage?
Typically people do not include their mortgage in this step. Instead they choose to start investing money while paying extra on their mortgage and increasing their generosity. Becoming debt free, except for the mortgage, typically takes about two years to accomplish. Paying off a mortgage will generally take between 5-7 years when people get serious about it and most people are not willing to wait to start investing that long. Paying off your debt, except for your mortgage, needs to be a priority.
Investing should be stopped for a short time to help you get out of debt faster. The next step in the process is to build your emergency fund up to a full 3-6 months of living expenses and then earning interest with your money takes hold. If you get aggressive you should be able to do all of this in less than three years and then you can start investing again and get your house paid off as soon as possible!
A Future of FREEDOM
Congratulations on making it this far! When you decide to change your habits and get out of debt you are making an active decision to live a life with a great level of financial freedom. There is more to a future of FREEDOM than just being out of debt though, being out of debt is just the beginning. If you truly want to experience financial freedom you will continue along in the process while increasing your generosity. The only way to truly be free in our finances is to realize that everything has been given to us by God and that it all truly belongs to Him. By developing a lifestyle and attitude of generosity we break the power that money has over us. We have to be faithful stewards of our money and learn to enjoy it within boundaries.
I look forward to hearing from you along the way as you begin gaining increasing levels of financial freedom. Please don’t hesitate to contact me if you would like some help along the way. I’m here to help you achieve your goals and to help guide you toward a life of freedom. You CAN change your financial future, but you have to do the work and the first step is to change your thinking. You can do this, if you put your mind to it. Life on the other side of debt is amazing and it only gets better! Again please call me at 573-208-4266 if I can help you in any way during this process.