04 Nov Real solutions for real problems: too much bad debt
This week on my blog I will be focusing on real solutions for real problems. Up first is too much bad debt.
Are you currently drowning in credit cards bills and consumer debt? If so, then take courage: there is HOPE! With a little bit of discipline and some smart money management, you CAN move away from a life of debt and move towards a life of financial freedom.
Where should you start?
- Learn about the Wealth Wheel
- Play offensive by generating more income
- Play defensive by reducing your living expenses and not creating more debt
- Use a significant percentage (30 – 40%) of your investment earnings to pay down your debt
- Use the Debt Snowball method (made popular by Dave Ramsey)
The Debt Snowball method is where you list all your credit cards on a sheet with their balances and interest rates.
- Start with the one that has the lowest balance and end with the one that has the highest balance, ignoring the interest rates for now. Then in another column list how much you pay toward your credit cards each month. Chances are you are paying more toward them than just the minimum amounts, and you are like most people you are paying the most towards the one you owe the most on. You will stop that now.
- Pay just the minimum payment on all of them except for the one that you owe the least on from now on. On that one, you will pay as much as possible. Apply as much of a bonus payment on top of the minimum payment on that first lowest balance credit card as possible each month.
- This method allows you to pay that one off quickly (usually within three to five months), which will give you a boost of excitement and motivation.
- Take the large payment you had been paying to that first credit card that is now no longer applied, and roll it over to the credit card with the second-lowest balance, in addition to the minimum payment you are making on that card. This will start paying that second-lowest credit card balance down quickly and actually even faster, because now you in effect are making two minimum payments, plus a bonus payment on this one, until you pay that one off.
- Take the total monthly boosted payment you made toward the second credit card, and roll that over to the third card until it is paid off, and then to the fourth and the fifth and to the car loans and furniture loans, etc.
Can you see how with that you start paying off card after card and card after card ever faster? It’s like magic! Each card that is paid off and each loan that is paid off is a little confidence booster that you can do this and that you are making progress.
Have a look at this graphic my team prepared to see how your life could be if you stick with it for a few years:
Bad debt is a real problem; but now you have a real solution.
Next post: What if you don’t make enough to cover your regular expenses?