Now it is time to get into the details and get started attacking this debt.
Not only has the outstanding amount of borrowing been steadily increasing, but the delinquencies have grown as well. Credit card delinquencies stand at 8.36%. Student loan delinquencies are at 11%. Auto loans are 5% delinquent. Credit card debt rose to a record $930 billion in the fourth quarter of 2019. According to Yahoo Finance, the total outstanding debt stands at $14 trillion.
If you have one of these loans (or perhaps all of these loans) that are making the banks rich, you are certainly not alone. There is another way. The alternative is to take the bull by the horns and get this debt paid off. Once you have gotten this debt eliminated, you can then enjoy the finer things in life.
What would being free from debt feel like? How does it feel now? Are you going to work every day to be broke at the end of the week? Is there nothing left over, so you must pull out that nasty credit card and charge expenses? The cycle continues because you only have enough to pay the debt and then when you need something, you charge it. Round and round you go, like a rat on wheel.
Are you dizzy? I am, just from writing that!
Have you had enough? If so, then I can help, and you will find yourself on the path to financial independence.
The Cure: Eliminate Debt Forever
The time has come to make some changes! Turn this into a game and get motivated! Be intense and get on the winning path.
Step One
Get all of your debt pulled together. List who you make payments to, account numbers, amounts owed, minimum balances due, due dates and interest rates. Include all your debt credit cards, auto loan(s), student loans, personal loans, maybe a payday loan. If you owe someone money then it is a debt; get it listed.
Once you have all that information compiled, add them all up. Most folks have no idea how much they owe. Add up all the monthly payments as well; this is important. Take a hard look at it. What could you do with that money if you did not need to give it to the banks or lenders you owe?
Step Two
Now it is time to get into the details and get started attacking this debt. Do you have a budget? My guess is you do not or you would not be reading this. Prepare your budget. I have been doing budgets for most of my life and have never had a perfect one. They are a plan! Remember, plans can and should be adjusted as new information become available. Without a plan, you are just wondering.
When you do your budget, make certain you include all your debt payments. Do you have enough income to make all your payments? If not, then we have more work to do. The goal is to have your income higher than your payments. We will need extra income to begin to pay down the debt.
Is there something you do not need in your budget? How about cable or some membership? Tighten those expenses. Remember, this is short-term until you get you finances under control.
If you have an income issue, you need to make more money. Get a second job, start a side hustle, do whatever it takes to get that debt paid off.
If you need help in building your budget you can find it here: https://thebiweeklyadvisor.com/10-easy-steps-to-creating-a-budget-that-will-put-you-on-the-path-to-financial-independence/.
Step Three
Get the scissors, get the credit cards and CUT THEM UP! Credit card debt is too easy to fall back into. So, time to break clean.
But, what if I have an emergency? How will I pay for it? Cash!
As quick as you can, save $1,000. This will be your short-term emergency fund to get you off of credit cards. Once you have all your debts paid, you will want to come back and create a three- to six- month emergency fund.
You can read about Emergency Funds here: https://thebiweeklyadvisor.com/six-reasons-why-having-an-emergency-fund-is-a-good-idea/.
How do you get the money for an emergency fund? Have a garage sale. Sell anything not nailed down. You want to have this in place within the first month of your journey.
We are now going to construct your plan to become debt-free.
Debt Avalanche
List your debt from the highest interest rate to the lowest. Begin to attack the first one on the list, making extra principal payments to get it paid off as quickly as you can. Continue to make minimum payments on everything else. Then, once the first one is paid off, use whatever you were paying to attack the next debt. Continue doing this until you have paid off all your debt.
Debt Snowball
Similar to the avalanche, with one exception: attack the smallest debt to the largest. Pay off the smallest then use that payment and pay off the next smallest until all have been paid. The last one will be the largest and the most difficult because it will take the longest.
Largest Payment to Smallest
This method I found to be the most interesting concept. Begin with the highest payment, adding extra and getting it paid off. Place no importance on the amount of the debt or the interest rate. With it being the largest payment the theory is once paid off, you now have this large payment plus some extra to attack the next largest payment. Your debts will quickly be paid and you will be on your way to financial success.
The Angry Attack Mode
This is one of the more interesting strategies. Pick the debt you hate the most. Zero in on it, attack it and get it paid off. Rank each debt from the most hated to the least hated. Get them out of your life!
Start with your credit card debt, student loans, car loans and any other loan you may have, then tackle the big one: your mortgage! It can be done.
Anything is possible with the right amount of focus and determination.
Good luck and let me know how your journey is going. QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA is the CFO of West Yavapai Guidance Clinic. He also is the owner operator of a website known as thebiweeklyadvisor.com, where such topics as budgeting, investing, paying off debt and goal setting is discussed.
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