How Proper Debt Management Will Make You Wealthy, Part II

In last month’s column, we discussed the different kinds of debt. In this column, Part II of our discussion on eliminating debt, we will explore how to create a foundation for building wealth. If you missed Part I, you can read it here: https://quadcitiesbusinessnews.com/how-proper-debt-management-will-make-you-wealthy/.

Get Mad

The first step for eliminating debt is getting mad. You must get mad at the banks, credit card companies and yourself. Paying them all that interest is working for them, not for you. Keep in mind that it was you who created this mess, not them, so be angry at that person in the mirror. The good news is that person in the mirror can also fix this problem. All you need is a plan.

Create the Plan

The first thing you must create is a budget. A budget will be the key to your success. Once you have created a budget, it will show you where your money is going. Hopefully, you have more income than expenses.

If not, you have more work to achieve. Review the expenses. What can you eliminate? Scale it down to the essentials. Get rid of those subscriptions, tighten up on that double latte and stop eating out. Get down to bare bones.

An alternative is to add extra income. Perhaps a second or third job. A good, solid budget may take a few months. Don’t give up and get persistent. It can be done.

The goal here is to create as much extra cash as you can to eliminate your debt as quickly as possible.

Attacking your Debt

The goal is to eliminate your debt in 24 months. This will require sacrifice and focus!

Let’s review the numbers. The average payments for credit cards, student loans and the car is $1,100. The combined balance owed is $69,900. That comes to about $2,900 per month, an extra $1,800 per month for 24 months. How can you achieve that? What should you do first?

Sell Stuff

Look around. Certainly there is stuff lying around that you thought you needed but now it collects dust. It’s time for a yard sale or perhaps you can sell on eBay or Facebook. Raise cash and clean it all out. Then put it all against your debt.

What about your car? An asset that loses value every day. It’s time to get rid of that. If you can sell that for what you owe, that is a big chunk of your debt. Replace it with something reliable to get you from point A to point B. You do not need to impress anyone. The reality is that perhaps in today’s used car market you could get more than what you owe.

If you did get more, you could put that with the money you raised from selling stuff to get a low-cost, reliable car.

And now, guess what? You have reduced your outstanding debt to $43,740 and eliminated a car payment of $600. Again, the goal is to be debt-free in 24 months, which is $1,822 per month. Only $722 additional per month is a bit more manageable.

Now we are getting the ball rolling.

The Rest of the Plan

This is the part where the rubber hits the road. It’s time to dig in. Create a list of all your debt. The amount you owe and the minimum payments per month.

There are two methods I like. The snowball method and the high payment snowball. Both are based on the concept of building momentum. Eliminate one debt and then the next until they are all paid.

Snowball

The snowball method is straightforward. Take the list of debts that you made earlier and order them from the lowest to the highest outstanding balance. Begin paying off the smallest balance first. Do not be concerned with the interest rate, as it will not have a significant impact on getting your debt paid off.

As you begin to pay off the smallest balance, it is imperative that you pay more than the minimum balance. This will get the balance paid off. The objective is to get it done fast. Continue to make the minimum payment on all the other debt.

Once you have paid off the smallest debt and move on to the next smallest, use the amount you were paying on the first debt and add it to the second debt minimum payment. Get that paid off as quickly as possible. Then, continue onto the next debt using the amount you were paying on the second debt and add it to the minimum payment of the third debt.

Continue to do this until you have paid off all your debt.

Highest Payment Snowball

This is similar to the snowball process described above with a minor change. Instead of the smallest debt, you start with the highest payment. Pay extra on the highest payment amount. Get it paid off, then roll onto the next highest. Continue to do this until you have mastered all your outstanding debt.

The theory is that by starting with the highest minimum payment you will have more to pay as you move through the lower payments, getting those lower ones paid faster.

Wrapping It Up

Millions of families have eliminated their debt. Either one of the methods discussed above will get you headed in the right direction to become debt-free. This is the next step in your journey to becoming wealthy.

While I have laid out a plan for you, it is just a plan. The rest is up to you. Stay focused. You can do it. Millions have. Imagine what life would be like without debt!

What can you do with the money you were using to pay debt?

Good luck! You work hard for your money, make sure it stays your money!

Thanks for reading, I hope you found this helpful. QCBN

By Steven Calabrese, CPA

Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.