Wednesday, August 2, 2017
My 6 Step Debt Elimination Process
During this week I have touched on many topics in the debt realm including student debt, emergency funds, HELOC’s and much more. Today I am going to get right to the nitty gritty of debt, how to get out of it. It is no secret that paying only the minimum payments gets you nowhere with your debts. Look at the top corner of your bill and you will see that if you only pay the minimum it’ll take you 70 years. That is no accident. The longer the repayment process is, the more interest that is paid. Debt is a big business and its mandate is taking money from the poor and middle class and giving it to the rich. I hate to sound apocalyptic and dramatic but I look at debt as a war. The enemy you are battling is those who wish you to be poor and debt-ridden. The bigger enemy is yourself and battling your habits and tendencies. Debt is far easier to get into than to get out of. In this post, I will show you a simple six step process to getting out of debt. It requires discipline, hard work, and patience but it can be done and I know this because I did it myself.
1) Organize Your Debts
Do you know everyone you owe money to? You wouldn’t believe how many people don’t. I know I didn’t know all the people I owed when I started paying them back. I had to obtain my credit report to get to the bottom of it. TransUnion and Equifax can help you obtain your report if needed. Anyways gather all your debts and that includes mom and dad or Uncle Johnny. Know the amount owed (the principal), the term of the loan (if applicable), the interest rate, and the minimum payment per month. Write down this information so it can be used. It should look like this:
Creditor Balance Interest Rate Monthly Minimum
1) Credit Cards $7000 19.99% $250
2) Line of Credit $5000 6% $120
3) Student Loan $20 000 4.5% $350
4) Mom and Dad $3000 0% $0
5) Rogers Cable $600 5% It Varies
Gather as much information about these debts as possible. Once you have them all on paper call up the ones that have higher interest rates and ask for lower rates. Tell them how you are taking some time to correct your debts and some leniency would help a lot. Many creditors will help you out if you ask so don’t be afraid to negotiate with them.
2) Create a Budget
I’ve said it before and I will say it again, “You have to have a Budget!” This includes for paying back debts. Within this budget, you will cut down on expenses and ramp up free money towards debt repayment. Does that suck? Yes, it sucks bad but it is the only way you will get out of debt.
If you need help with a budget email for my Monthly Finances Worksheet and it will help out a lot.
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When you find out how much extra money you have per month to dedicate to debt repayment you now know what is gone forever every month. Make sure you choose a number that is aggressive yet livable. You don’t want to be going into more debt while you are trying to get out of debt.
3) Choose Your Target
You now know what you owe and what you can spare every month towards debt repayment. You have to knock these debts out one by one. Choose your first victim as the one with the smallest amount. Some people will tell you to go after the one with the highest interest. While that is a good strategy I recommend getting a victory under your belt quickly. If you can take month one to repay Rogers Cable the money you owe them, then do it right away. String together a few W’s and you will feel very successful and will be more likely to continue on with the plan. This is all about confidence and discipline, so keep the motivation level high.
4) Slay, Slay, Slay
Kill that debt all day every day. You are on a mission. Never deviate from the plan. During your debt repayment journey, things will come up that will try to derail you. Parties, illness, being overworked, weddings and unexpected expenses will try to throw you off track. Shake them off like a bad ex-lover. You have to sacrifice while this process is happening or else it won’t work. Knock the debts off one by one while paying the minimums on the others to stay in good standing. Any debt with 0% interest and no repayment minimum will have to wait, (sorry mom and dad). You will get to those last and believe me they will understand.
5) Rinse and Repeat
Rinse off the old debts and work on the ones that are left. Do this until there is one larger debt left. For many younger people, this will be their student loan. Nail the credit card and line of credit first because of the high interest and lack of flexibility. You can often claim poverty with the student loan and negotiate a lower payment. Negotiate that lower payment but don’t pay only that minimum. You have negotiated the lower payment to help you tackle the other debts first and also to help you if a tight month comes. You know you can pay less, but you will pay more. It is the only way it’ll go away. When you have one debt left, you will see dramatic progress made monthly with every payment. Don’t forget to apply any windfall like a large tax return to your debts. Every little bit helps so don’t get the travel bug while you are on your mission.
6) Once you are debt free, don’t stop there
There is an important lesson to learn while you are paying off debt. The lesson is simple: Debt sucks and paying it off sucks big time. So what do we do when we learn a lesson? We make sure we never have to do something that crappy again. How do we do this? When you pay off your entire debt take the number you were paying per month towards debt and turn that into an emergency fund. You now have no debt and in very little time you will have a healthy rainy day fund so you will never be in debt again. YOU HAVE TO DO THIS STEP! Not doing it will help you fall back into the debt trap again. What this meant for me is 5 years of hard work to eliminate debt and build up savings. Was it worth it? Hell yes!! It had to be done and if it means missing parties and losing friends, so be it.
It is important to understand that the business of debt only makes certain people rich. When the banks and credit card companies get rich is it good for you? Not at all! You are in the business of you. There are enough people out there to make the creditors rich, don’t be one of them. More happy about the debt being gone in my life is the mental state I have now that I am out. I am a lean mean saving machine and the thought of debt grosses me out. I will never be in a position like I was before and that is the way it has to be. Take these steps and you will be debt free. Treat your money like a business because you can be sure that the people who want to take it from you are doing that.
If you are interested in being debt free and starting your own savings program feel free to contact me at joe@budgetboss.ca. Happy savings friends!
“Success is the result of perfection, hard work, learning from failure, loyalty, and persistence.” – Colin Powell
Email – joe@budgetboss.ca
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