Your Debt is an EMERGENCY! It is killing your future self. You can’t build wealth with a pile of credit card debt and car loans hanging from your neck and you need to treat it like the emergency it is. You have to get angry that you’re in debt so that you can attack it as if it were holding you captive and making you a slave, because when you’re in debt, you are a slave. You’re a slave to the financial institutions, car companies, credit card companies and anyone else you borrowed money from. Don’t be a slave anymore! Get ANGRY!!!
Getting out of debt is not easy, but it is worth the effort. For most people, wealth is built from your income, and you can’t use your income to build wealth if you’re like I was and paying $1,000 per month towards car payments, and $500 per month in credit card payments. Don’t forget that I also had a $2,000 per month mortgage. How can you save money with all of those payments? You either have to significantly increase your income, payoff the debt, or preferably, do both! Here we are going to talk about getting out of debt.
Step 2: Get Out of Debt
The first thing you need to do is write a list of everyone you owe money. Do not include your house in this step. We will focus on that in Step 5. Figure out how much money you are in debt to each person/company in that list and sort them out from smallest to largest. Here’s an example:
|Item||Total Payoff||Minimum Payment||New Payment|
|Credit Card 1||$1,000||$10|
|Credit Card 2||$5,000||$50|
|Student Loan 1||$24,000||$230|
|Student Loan 2||$36,000||$360|
|Net Worth Explosion|
You can see that all debts are listed by smallest total payoff to largest total payoff amount. You don’t need to be concerned about the interest rates of the loans unless 2 debts have a similar balance. If you have 2 debts like this, list the one with the highest interest rate first. However, you’ll be paying the debts off fast enough that the interests rates will not affect the math too much.
Since you’ve created your budget in Step 1 you know how much money you have left over after you’ve accounted for all expenses. **Don’t forget that YOU WILL continue paying the minimum payments on all of your debts.** The “New Payment” column is a combination of the minimum payment of that particular loan and the money you have left over, according to your budget. You will take all of your “extra” money and throw it at the smallest debt until it’s paid off. After each debt is paid off you’ll take all of the “extra” money that was in your budget, add the minimum payment from the debt you just paid off, and apply it to the next debt. This is called a DEBT SNOWBALL. As you pay off each debt you’ll start building a lot of momentum and you’ll be out of debt in no time!
Getting out of debt can take a little or a lot of time depending on the circumstances. It took me 3 years to get out of debt but others have done it in less than a year. It all depends on the amount of debt you have and the size of the snowball you can throw at your debt.
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