Continuing the series I wrote in 2014. This one is about how to get out of debt. I have used some of these principles now to help begin the process of debt elimination. Would that I would never get into debt again, but I know myself too well!
Getting out of Debt:
“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.”Henrik Ibsen
The best way to get out of debt is to not get into debt. However, if you are like the majority you already have a great deal of debt and you want to know the best way to pay it off.
The most important income generator is you. You are the one who makes money by your labor and it is imperative that you hold onto it by saving and earning interest. This is how you become wealthy. Debt decreases your ability to save as much as you otherwise would and you are on the opposite end of interest. In other words, you are paying interest as opposed to receiving it.
The first principle to get out of debt is to stop spending. If you stop getting into debt and pay the minimum payment, you will pay off your debt in the allotted time of the contract – 5 years, 10 years, 30 years etc. Of course, the goal is to pay it of faster and start saving, but if you were at retirement age and had zero debt, you would be better off than most people.
So you really need to get rid of the credit cards and make a promise to yourself that you will never borrow again for any reason. It’s tough, I know, but your financial future is what is at risk.
Next you will want to save some cash on hand. Something small like $500 or $1,000. This will be a good emergency fund for you, so if something breaks while you are paying off debt you will have cash to pay and not return to using a credit card.
There are two ways to pay down debt and they are similar in style, but not outcome. It really depends on if you are worried about numbers or behavior. What you do is list all of your debts and the monthly payments, total due and interest paid. The order will be determined either by total amount due or interest being paid. If you are worried about the money side then list them by highest interest first. If it’s the behavior then list the debts by smallest total amount first. This will give you some quick wins to get the ball rolling. You pay the minimum payment on everything except for the first one on your list. This one you attack with everything you have until you have paid it off. You then carry over that money to the next debt on your list in addition to the minimum payment until that one is paid. You keep doing this until all of the debt have been paid.
This has been a tried and tested method for debt reduction and it is essential that you begin now. Imagine what it will be like when you are no longer obligated to pay other people and you can start paying yourself instead. That is the secret to generating great wealth.
Lesson #1 Pay Yourself First
Lesson #2 Avoid Debt
Lesson #3 How to get out of Debt
Next Lesson – Giving to others.