WhereYouAreNow

Not sure what this is about? You may want to read part I and part II.

Last week, in our journey to redefine the American Dream, we discovered that IT was being accomplished by the use of debt which essentially means that people are not saving money. Well, coming to that conclusion is all fine and dandy but what do you do about debt? How do you get rid of it? Where do you start? These are all questions I am very happy you asked!

What do you need to do about your debt?

I am going to reverse that and tell you what NOT to do about your debt, don’t ignore it. Just don’t even give yourself that option. Ignoring the problem will not make it go away. I can drive my car around with a flat tire and pretend it’s not there, hoping that it will miraculously inflate itself, but we all know, this just is not going to happen. Same goes with your debt. If you are riding around with a pile of debt in your trunk, which is giving you terrible gas mileage, then you need to get rid of it! You won’t get better gas mileage, and you won’t begin to lift the burden that is puts on you, unless you deal with the problem.

How do you get rid of it?

Pay it off. Really, unless you can trade manual labor for the balance, you need to start paying down your debt with cold, hard, cash. And if you are behind on your payments CALL THE LENDER! even better, go meet them face to face if you can! You may feel like I’m throwing you into the lions den with this advice, but it is better that you make the first move. Explain to them that you understand that you are behind on your payments but that you are going to start making payments (give them a time line like one or two weeks, for example). Try to negotiate a lower interest rate, but don’t make this the main purpose of your call/visit. Your goal here is to simply be honest and upfront with them. “Honesty is the BEST policy”.

Where do I start?

I have read numerous articles, books, and heard people speak on where to start paying down on your debt. There are many “theories” out there but when you really get down to it, they are just one persons idea up against another person’s. Here is what I have filtered out to be the best way to eliminate your debt:

On a piece of paper or in an Excel spreadsheet, list all of your debts (consumer and credit) starting with the lowest BALANCE (lowest to highest). Then, next to those amounts write who it is owed to and their minimum payments. That is your game plan on paper. You are going to, in the word’s of Dave Ramsey, get “gazelle intent” on eliminating the lowest balance while making minimum payments on all the rest. Once you knock out the smallest balance you roll the cash you were throwing at that right into the next balance. Defeat that one, roll that cash right on to the next. This is why they call it the “snow ball effect”.

Why pay the lowest first? Because you will get it done quick which will accomplish two things: 1) boost your ego. You now KNOW that you can do this. If you tried to tackle the highest first you would most likely fail and not finish it. This ensures that you will stick with it and move on to the next one, because you did the lowest one!! 2) it frees up cash quicker which can be thrown into the next debt. If you tried to tackle the big one first you would not free up cash for a VERY long time, which would keep your debt around longer. You want to free up as much cash as possible (and as quick as possible) and a very good way to do this is to get rid of the ankle biters, the little balances that are a nuisances.

Once you have eliminated your credit card debt start SAVING your money. If you don’t have one already, get an emergency fund with no less than $1,000 in it. From there move onto getting 3-6 months of what it takes to meet your budget each month into savings. The idea here is to GET RID of debt and BUILD UP SOME CUSHION. Because here is the problem, an emergency is going to happen (I will personally guarantee this) and in order to stay out of debt, you need to have the CASH to meet the financial needs of that emergency.

Without the cash saved guess where you go…right back into debt.