Here’s a personal question for you… How much debt do you have?
And here’s another one… Do you have too much?
And how much does it really cost you to carry the debt you have? Any idea?
How did credit cards become such an integral part of our daily lives? How did the American Dream evolve into a nightmare… keeping you awake at nights wondering how you can make all your payments and still keep all the promises you made to yourself and your family?
Banks and credit card companies have been telling us for years that it’s fine to go into debt. You work hard and you deserve it. Why should you deprive yourself? Especially if you can meet the low, monthly payments.
Special credit offers entice you to forget about your debt worries and spend more. It’s not real money anyway! Credit cards became essential to buy us the superficial happiness we thought we wanted.
Do you still dream of having it all? A good life for your family? Financial security? Is it possible without going into debt?
No matter what your personal beliefs are, credit purchases run our country. The government does it. Everyone else does it. Why shouldn’t you?
Although it helps our economy, the truth is that it’s the worst thing you can do to your family. It absolutely destroys any chance you have of creating true wealth. And with all of the stress that comes with being in debt, there’s quite a bit of damage to your overall health, as well.
For most people, a haphazard approach to debt reduction and financial recovery will not be sufficient to escape the spiral of ever-increasing debt.
The Journey Into Debt… How Did We Get Here?
For many, getting your first credit card is a rite of passage. You’re not a child anymore. You’re all grown up. But nobody ever took the time to tell you about the downside to debt. And how you’re trading a few moments of joy and happiness without understanding the true cost of the debt that you just incurred.
The more the merrier… In South Louisiana, where seafood is a staple, crabbers will leave a box of crabs on the pier with no cover and no fear of losing a single one of their day’s catch. Why? Because crabs, like well-meaning friends and family, will try to protect their own. Each time one of the crabs tries to crawl out of the box, the other crabs will grab his leg and pull him back! Allowed to leave, the crab could eventually crawl back to water and save his life. But, all the other crabs knowing ‘what is best’, hold him in the box… and together will all meet a similar fate… on someone’s dinner plate!
As well-meaning as your friends and family are, they like you just the way you are! Don’t change! And besides, you can’t learn how to get out of debt. If there was a way to get out of debt, why hasn’t someone we know done it, yet? No one in our family has ever done it… it’s just the way life is.
Defeat the Debtor’s Mindset
Your attitudes regarding debt were formed over many, many years. Every day your brain has been bombarded with hundreds of marketing messages enticing you to buy things that you absolutely cannot live without. With pennies in your pocket, your credit cards have allowed you to keep the promises you’ve made to yourself and your family. Until now…
You work hard. You deserve it. And you need to get it now! It’s only $99/month… low monthly payments so I can bring it home today. Your financial life has stalled and you’ve fallen into a deep, debt spiral. Can you pull out before it’s too late?
I don’t imagine that you’ve ever tried to boil a frog… or ever wanted to!? But if you did, you would discover that if you brought the water to a boil and then put the frog in the pot, he would jump right out. The secret is to put the frog in the pot with cold water… and then turn up the heat. The frog will settle down and go to sleep. Soon the water is boiling and the frog never realizes the danger he is in. (And voilá… frog legs for dinner!)
The story about the frog is very much like the debt journey that you’ve been on. It all started with a couple of small, innocent purchases that you were sure you would pay off when the credit card bill came. It all became very comfortable until… it wasn’t. The good news for you is that it’s not too late to save you.
Yes, you can choose to blame those darn commercials and the blasted banks that made it so easy to get credit so you could buy everything you want even if you did not have the money today to pay for it.
Life gives us many choices… and the choices we make today will create our life tomorrow. Where will your choices take you?
According to Albert Einstein, the definition of insanity is doing the same thing over and over again and expecting different results.
Have you determined that what you’ve been doing isn’t working? Is it time to focus on what has worked for thousands? The process is simple. What it comes down to is whether you want it badly enough. Will you do the simple tasks that need to be completed to accomplish the goal… becoming debt-free?
Debt Warning Sign: The Games We Play
Do you remember the cartoon “Popeye”, where the character Wimpy would often say: “I’ll gladly pay you Tuesday for a hamburger today”. He was always looking for someone to buy him a hamburger because he was always hungry and he didn’t have the money to pay for them.
Have you ever heard people say that everything will be fine once they get that raise? Or that new job? But you know what? Typically, it doesn’t matter how much you make. If you can’t live within your income today, it’s very unlikely that you ever will!
Just about everyone accepts credit cards. They make it extremely convenient to use your credit cards to pay your bills.
And so it goes… a debt spiral… heading down the slippery slope… until you’re mired in the quicksand of debt
Or do you leave your bills unopened. Maybe you play the game that Lucy played on “I Love Lucy”. She would take all of the envelopes with bills in them and she would throw them into the air. Then, she would only pay the bills that landed face up. We get pretty creative, don’t we?
You’d rather guess how much you owe, rather than know for sure. You don’t keep track because you can’t pay it so you’d rather not know. Or maybe you’re just making minimum payments… surviving until next month. Maybe you’ll win the lottery!
Every time you increase your debt, you are mortgaging your future. The interest you’re paying to your creditors is robbing your future.
Time to Escape Your Debt Spiral? Pay Attention!
Debt is a mathematical equation. Debt is simply a function of income and expense. Put too much on one side of the equal sign and you’ll have to file bankruptcy. Put enough on the other side and you will be debt free and accumulating wealth.
Let’s talk about two different financial principals that are generally reserved for people wanting to grow their money. It’s important to bring these up so you know what you’re up against. Because the very thing that can grow your wealth, can make it almost impossible to pay off your debt as it works against you.
Compound Interest – The 8th Wonder of the World
The first financial principal is the magic of compounding. Albert Einstein called compound interest the 8th wonder of the world… He who understands it, earns it… He who doesn’t pays it”.
Let me ask you a question. If you were given a choice between getting paid $1,000 per day, every day for 30 days; or get a penny, doubled every day, which would you choose?
On the one hand, you know for sure that you will get paid $30,000 at the end of 30 days. On the other hand, how much will the penny doubling every day for 30 days be worth?
Could it possibly be worth more than $30,000? Most would say “No Way!”
Let’s take a look… If you decided to take the penny doubling every day, you would have made a whopping $5.12 after 10 days. The $30,000 looks pretty good, doesn’t it?
And at 20 days, you’re somewhat shocked that the amount has jumped to $5,242.88. But that’s still nowhere close to $30,000, is it?
But those last 10 days really kick in and after 30 days (and starting out only with a penny!), you will have been paid over $5 Million!
This shows the magical powers of compounding your money. If you’re saving and investing, you have this working FOR you. However, if you’re struggling with debt, this powerful financial principal is working AGAINST you.
Negative interest compounding day after day, year after year. Mortgaging your future. As long as you’re in debt, every dollar you earn will be shared with anyone you owe money.
The Rule of 72
Let’s take a look at the second financial principal… the Rule of 72. This simple rule will tell you how often your money will double. As we’re going through the Rule of 72, I want you to think about the interest rate that you’re paying for your loans and credit cards.
Again, if we’re saving and investing, this rule will work in your favor.
Here’s how it works:
How Quickly Will Your Money Double? If you want to learn how quickly your money will double, all you need to do is take the interest rate you’re earning and divide that number into 72.
For example, your $1,000 sitting in a bank account earning 1% will take 72 years before it grows to $2,000. [72/1 = 72 years]
Now, if you could earn 6%, your $1,000 would grow to $2,000 in only 12 years [72/6 = 12].
How about if you earn 12% on your $1,000? Then it would grow to $2,000 in only 6 years! [72/12 = 6 years].
Do you see how powerful that is if it’s working in your favor?
Let me ask you this… Do you have any idea what interest you’re paying for the money you’ve borrowed? 14%? 18%? 21% or more? How quickly is that money growing and doubling for the banks and credit card companies? How does that compare to what you’re paying?
It’s important to understand how money works, and our goal is to ultimately get it working in your favor… not against you!
Decide to Become Free From Debt
I’m not here to tell you that “it’s not your fault”. That’s not fair to you. Take responsibility for where you’re at today. Let’s draw out a map to determine the path where you really want to be.
Use your emotions to solidify your determination; and use logic to work through the math problem to get yourself out of debt. If you’re serious, let’s work through this together and you’ll see a crystal clear path to follow.
This is not a casual decision… if you’re not 100% committed, you will fail! (There’s too many powers working against you!)
Is your reason why you want to destroy your debt stronger than any excuse you can come up with to keep debting?
Debt is nothing but a temporary situation. Your past does not equal your future. Isn’t it time to change your future for the sake of your kids?
You’re going to stop the debt spiral in its tracks!
Can you imagine that? Becoming free from debt?
It’s time to make a decision. Make it a top priority in your daily life.
Let’s get rid of your old belief, that debt is a way of life. Incorporate your new belief that people actually do live debt-free.
Forget about mistakes from the past. There’s an old Chinese saying… “Fall down seven times, get up eight!”
Remember, it’s a mathematical equation! You’re in debt because you spend more than you earn (easy math!) Is it easier for you to reduce expenses or increase income? Your choice! That’s really what it’s about.
3-Step Process to Debt Freedom: Cash Flow | Spending Plan
Get yourself a small pocket notebook to track your spending over the next 30 days. Write down EVERYTHING you spend. Total up your expenses and subtract your expense total from your income during the same time period. This will give you the amount you have available to you to put toward paying down debt. If it’s a negative number, you will have some tough decisions to make.
Remember, it’s as simple as reducing expenses or increasing income. If your income is not sufficient, what are you going to do? Is it time to sell some things? Or downgrade? Do you really need 680 television channels? Or are all of your expenses absolutely necessary?
Then it’s time to figure out how to make more money! A second job? A side gig or side hustle?
This is where you find out how serious you are about shredding debt.
Ok, the next step is to list all of your loans and credit cards… EVERYTHING. You can list them on paper, or open up a spreadsheet and list them there. Here are the columns you need:
<<Creditor | Unpaid Balance | Min Pmt | % Int | Amt Pd>>
From your 30 day exercise, take the amount available to put toward debt.
Earn more | spend less… it’s as simple as that.
Step 1 – Establish mini-emergency fund ($1k). Okay, now you’re probably wondering why putting money into an emergency fund is the first step to getting out of debt. Very simple. While we’re getting out of debt, we do not want to have to go further into debt if an emergency comes up.
I would challenge you to get this done in the next 30 days. Have a garage sale. Sell stuff / toys you don’t need. Use tax refunds to put toward your mini emergency fund (or adjust withholding so you have access to this money throughout the year). Pick up a second shift or volunteer for overtime. Start a second job solely to go toward the destruction of your debt.
Step 2 – Select your Debt Pay Down Strategy. (See the next section: Debt Pay Down Strategies) Restructure loans. Ask for lower interest rates on all the loans / credit cards you have. If it makes sense, transfer balances to 0% rate offers (just be aware they generally have a 3% transfer fee).
Step 3 – Increase your emergency fund to 3 – 6 months of EXPENSES. Now that you’ve paid off all of your debt, continue to make those same payments to yourself! It’s time to build up your emergency fund to cover 3 – 6 months of expenses.
That may sound like a lot, but what would you do if you lost your job? How long would it take to find a new one? You want to position yourself so that going back into debt is NOT an option for you. You owe it to yourself. Just do it!
Debt Pay Down Strategies – Choose Your Strategy
- Avalanche – start with highest interest first. Pay off most expensive | costliest debts first.
Prioritize your debt from highest to lowest interest rate and focus on the card with the highest rate.
- Debt Snowball – start with lowest balance first (gets paid off quicker and gives a psychological boost). List your debts in descending order with the smallest payoff or balance ﬁrst.
Do not be concerned with interest rates or terms unless two debts have similar payoffs; then list the higher interest-rate debt ﬁrst. Paying the little debts off ﬁrst shows you quick feedback, and you are more likely to stay with the plan.
- Cash Flow Index – pays off least efficient loans first. Loan Balance / Min Payment = Cash Flow Index. The higher the index, the less efficient the loan, from a cash flow perspective. If cash flow is important to you, then this is the strategy you will want.
You’re probably wondering which of these strategies will work the best for you. The answer is… the one that you will use. Keep it simple. Make a game of it. The important thing is to make your debts decrease month after month until they’re GONE!
Regardless of which strategy you choose, you will always take the initial discretionary cash and add that to the payment of the next loan in line to demolish your debt.
And that’s it! Don’t stop until you’ve reached your goal. Now’s the time to tell everyone that’s interested that you’ve just annihilated your debt. It’s all gone! You’re completely debt-free… never to go there again!
Never stop dreaming. Never stop taking action.
There is no try. Just do!
And be sure to let me know, too. I’m excited to hear your success stories