Eliminate Debt and Build Wealth
Introduction
Getting out of debt is a great plan. I don’t think anyone would argue with me on that point. However, starting that journey to eliminate debt can be a daunting task. That first step is often the most difficult and certainly, the most challenging. As with most challenges in life, having a plan brings things into perspective and provides us with a roadmap to achieving our goals. In addition, having a plan gives us peace of mind, peace of heart, and security.
Know that there are going to be challenges. You will stumble and that’s okay. But, you can do this. Remember, we weren’t born knowing how to budget or manage debt. These are learned skills, give yourself grace and understanding. Afterall, I am here to teach you and support you!
Paying Off Debt
1. Debt Free Living
How would you feel if you had no debt? Excited? Stress-free? Secure?
How would you spend your time? Traveling? Dining out? Helping others?
How would this financial freedom feel for YOU? Take a minute (or 2 or 3) and reflect on this. Grab a notebook and write down what a day without debt looks like for you. Are you building that savings account? Perhaps you are stashing cash for your dream vacation. Maybe you going out to dinner and a show with friends or family. Write down how it feels to eliminate debt. Is it empowering to see those balances drop? How amazing do you feel paying extra on your credit cards? What does it feel like to have the weight of debt begin to lessen?
Let’s face it, debt restricts your ability to be free. Debt weighs on you physically, mentally, and spiritually. Not to mention, being overloaded with debt causes stress and worry which can lead to a plethora of physical ailments. Ailments that range from sleepless nights to headaches to ulcers.
2. Good News
The good news is you can change that scenario. Moreover, I am here to teach you how to eliminate debt with a clear, consistent, and concise plan. Being debt-free gives you the freedom to do what you want; you are not tied to a bank or another individual. Being debt-free puts you in the driver’s seat. You will “Tell your money where to go”.
You may be saying “Lisa, this sounds great, but how do I achieve being debt-free?” Read on my friend, a couple of options await you!
Not only I will be discussing what debt is, but also, I will review the two most common strategies to eliminate debt from your life!
The two common approaches to paying off debt; are the debt avalanche method and the debt snowball method.
Debt Defined
To talk about debt we first need to define it. The short and sweet definition (let’s get to the point) is, debt is money you owe someone else. That someone can be a bank, credit union, friend, or another individual.
When you borrow money, there is a cost associated with borrowing that money. This cost is called interest (tied to the interest rate). Therefore, each month when you make your payment, part of the payment goes towards the principal (the amount you borrowed) and the remainder of the payment goes to the interest (the cost of borrowing the money).
We will dive into the ins and outs of loans – principal amounts, interest rates, and terms – in a future article.
Right now let’s focus on knocking down that debt!
1. Key Points
Just a couple of points before moving on.
First, remember that debt is legally binding. If your debt is not paid, there are many negative consequences that can happen: negative effects on your credit score, you could be sued, or you may have to declare bankruptcy. You want to avoid those storylines like the plague.
However, if you have experienced a negative consequence, no worries, you are moving forward in the right direction now. There is no shaming, no making you feel guilty, and definitely no judgment here. I have had some blips in my money management journey. It is because of those blips, those struggles, those mistakes that I am here and laser-focused on helping you avoid the negative storylines of money management. Now, on to brighter topics!
Getting out of debt is a great goal, and you most certainly will feel like a weight has been lifted off your shoulders when you achieve this goal. Furthermore, once your debt is gone, you essentially give yourself a raise; you have more money coming to you each month for you to save, invest, donate, or spend. Yes! You get to “Tell your money where to go!” This is such a freeing feeling and one you most certainly deserve to achieve.
2. Your Financial Why
I want YOU to experience the amazing freedom that comes with being debt-free. One crucial step to becoming debt-free is to implement and stick to a monthly budget. More on budgeting later in this article.
An important and often overlooked step on the road to financial freedom and financial security is determining your “financial why”. It is great to say you want to get out of debt and it is even better to actually get out of debt, but often it is not enough to keep us out of debt.
Let me explain the “financial why” statement. When we have a “why” behind a decision we are more likely to stick with that decision. Let’s use working out as an example. If I decide to work out because I know it is the right thing to do or because my friend, co-worker, or partner does it, chances are I will not stick with my workout routine. The “why” is really not that strong or meaningful to me. However, if I work out because I want to feel good, I want to relieve stress and I want to age in a healthy way – this “why” is tied to something meaningful to ME! Chances are greater that I will continue to work out – now I will have ups and downs (we are human), but overall feeling good, relieving stress, and aging in a healthy way will keep me moving and motivated.
Similarly, the same is true with your “financial why”. To say you want to get out of debt because you know you should is not a very motivating factor. On the other hand, to say you want to eliminate your debt so you can take that money and save for the 3-month sabbatical you have been dreaming of or so you can make an impact with a local charity you volunteer at – those are “financial whys” that you will get behind with your whole being. When you hit a tough spot and you will because we are human, tap into your “financial why” – find that visceral feeling and get back on track.
3. Debt-Elimination Strategies
Now for the two debt-elimination strategies. The two main strategies for becoming debt-free are the debt avalanche method and the debt snowball method.
Both methods are straightforward and easy to implement. Start by compiling a list of your debts and their interest rates. This list does not need to be fancy. It can be three columns on a piece of notebook paper with the headings, Debt Name, Debt Amount, and Debt Interest Rate. Or, if you prefer you can make your list in a spreadsheet program. The same information applies either way. Once you have compiled the list, you will pay a little extra each month towards a chosen debt determined by the method you choose.
The Debt Avalanche Method
Using the debt avalanche method, you pay off your debts by paying that little extra amount toward your debt with the highest interest rate first. The highest interest rate debt is charging you the most money each month to use the lender’s money. Look at your list of debts and determine which one has the highest interest rate. Is it a credit card (more than likely)? An auto loan? A personal loan?
The debt with the highest interest rate is the debt you will focus on eliminating FIRST. The extra amount that you determine you have to apply towards debt reduction gets paid to this debt (see image below).
Once you have paid off the above debt (the one with the highest interest rate), you take the entire amount of the paid-off debt’s payment and pay it towards the debt with the second-highest interest rate (refer to the image below).
Likewise, you continue to do this until all your debt is paid off. This method is the mathematically optimal debt reduction strategy. You are wiping out the higher interest rate debts before the lower interest rate debts, thus saving yourself hundreds of dollars in interest payments. Additionally, the image below demonstrates how the Debt Avalanche plan works. I always find a visual example to be extremely helpful, I hope you do too.
Penny’s Success
Penny was able to pay off the balance on two credit cards using the debt avalanche method and then began applying those payments as “extra payments” on her student loan – knocking that principal down FASTER!
Penny liked the debt avalanche method because, in the long run, it was saving her the most money by knocking out the highest interest-rate debt first.
NOTE: When you apply additional payments to a loan make sure those additional payments are applied to the principal of the loan and NOT to future payments. Sometimes this requires a call to the bank or financial institution that is holding your loan. Oftentimes, the lender does not make this easy. Why would they? It is costing them money. Be polite, be patient, and be persistent.
The Debt Snowball Method
Using the debt snowball method, you pay off your debts by paying that little extra amount toward your debt with the smallest balance first (see image below). The idea here is to wipe out the smallest debt no matter the interest rate. Thus giving you a “win” sooner rather than later. And wins feel good, therefore, you get a physical and psychological boost.
Once you have paid off the above debt (the one with the smallest balance), you take that payment towards the debt with the next smallest balance. You keep working on this plan until- voilà your debt has been eliminated (refer to the image below).
You let the snowball gain momentum and continue to knock your debt down. This method gives you a quick psychological win – you knock out the smallest debt ASAP and it feels good to have it gone! Then you knock out the next debt and the next and just like that, you are debt free. You did it because you faced your debt, decided on a plan, and implemented it. You are awesome!
Sarah’s Success
Sarah used the debt snowball method to pay off three credit cards.
She had been riding the debt rollercoaster for several years and getting the quick psychological win was HUGE for her. Seeing the balance on the first credit card of $0 was empowering and liberating!
Sarah felt like a weight had been lifted off her shoulders and for the first time in several years, she felt hopeful when it came to her financial situation.
The Choice
Okay, here comes the work! You need to decide which method you are going to implement. Which method makes the most sense to you? Which method “feels right”? It is important to realize, the only wrong answer here is to choose no method. Isn’t that what you have chosen up until this point? But we are not looking back we are only looking forward….Debt Avalanche Method or Debt Snowball Method?
Great, now that you have decided on your method, let’s get to knockin’ down your debt.
Conclusion
In conclusion, I want YOU to experience the amazing freedom that comes with being debt-free. One crucial step I mentioned earlier to becoming debt-free is to implement and stick to a monthly budget. Do you have a budget in place? Do you need assistance with getting a budget together?
This is my offer…How about we jump on a FREE 30-minute call to get you headed in the right direction?
No catch, no charge, and no commitment. I just want to provide peace and clarity to you in this matter, and hopefully connect with you for future possibilities.
If this resonates with you, click the link and book a call with me whenever suits you.
