There are 47 million people on food stamps and 23 million people out of work and what continues to happen is that all of us keep living way past our means by acquiring more debt. How do we fix this? Most people think that focusing on the expense side of the ledger is what will do it, but is that really working? No it’s not. We have to develop a personal finance strategy that works by facts, mathematics and process and creates debt reducing strategies.
The following “War on Debt Strategy” is a simple plan that should be followed how it is laid out. I am giving you this information because it works as it is what I have done. 12 years ago, I was bankrupt and, over time, things improved a little simply because I was able to command a good salary being in International Accounting, but it didn’t get progressively better until I implemented the debt reducing strategies and income streams that are detailed out below. Because of these strategies, my family and I are now financially free!
You want to get out of debt and become financially free? Then take this advice and get into action.
Increase Revenue Streams (1st Time)-This is key. Way too many people focus on just one side of debt/wealth equation which is WHY they stay in debt. They are solely concerned with the expenses or financial outflows.
Yes, we should do everything we can to decrease expense, but the biggest variable in this equation is INCOME! Generating more income is the key to any wealth building strategy as it is has the most upside.
For example, we can only decrease our expenses so much. We could even decrease our expenses to $0, but what have we actually done, maybe moved the needle $5,000 per month? Generating income in different ways can be multitudes of $5,000, therefore, a much more effective way to change the financial trajectory of a family.
When working on our financial outlay, increasing revenue streams is a must. There are many things that can be done in order to affect the income streams and some are very simple; get a paper route, donate blood, get a 2nd job, etc. The route I chose was much more lucrative and I will go into further detail at the end of this article, but I want you to get these principles down first.
Make a Budget/Decrease Expense-Like I said above, we can only affect the expense side of the equation so much before we hit $0 in expenses (which is not possible in this world). But, we need to do as much as possible to decrease this side of the ledger. But before we start the expense reduction process, we have to know what we are paying which is why a budget is needed.
A budget can be as simple as a piece of paper where you write all your monthly expenses down in three sections; Fixed, Variable, and Debt. The Fixed expenses are those expenses that you are billed each month that don’t vary much in dollars. Examples may be your water bill, mortgage, phone, etc. The Variable expenses are everything else (except debt); groceries, gas, entertainment, etc. The Debt needs to have your monthly minimum payments along with the current balance of the loan/credit cards. Get your budget together first so we know what we have to deal with, then add your income to the top to see what your total cash flow is per month.
In terms of the Fixed expenses; are you paying any bills that are unnecessary? For example, you may have a subscription to something that is auto-billed to your credit card that you have been meaning to get rid of for 12 months. Get rid of it!
Another Fixed expense strategy is to compare vendors. There are usually several different vendors of the products/services we use on a monthly basis that are comparable in the quality they give. Can we move to a vendor with a cheaper plan? Even if it is only $20, it is another $20 you have to pay towards the debt.
On the Variable expenses, we want to be mindful of what we are spending which is what the budget is designed to do. After a few months, you should be able to see where you are ending up in these categories. Simple things like using coupons, gas points, etc. are ways to reduce these loads.
For the Debt, the next few paragraphs will help guide you on how to effectively decrease the debt load.
Before moving on to the next point, check out this YouTube video I did on how to build a budget;
Cash Purchasing-In the beginning of your journey to get out of debt and into financial abundance, using cash to purchase LUXURY items is a must. After you have paid your bills and are current on all obligations, whatever you have left could be used to purchase a luxury item (new couch, new TV, etc.). Notice I used the word “could” as we do not have to spend everything we bring in (lesson I had to learn). At this point, if you do have enough in cash to purchase something, then go for it, but only if you have the cash. What I am trying to do here is get you away from slamming everything on the credit cards!
Paycheck Parking-Credit Card debt is where the majority of people waste the most money because of the compound interest principle. “Paycheck Parking” is a VERY strong strategy for reducing your credit card debt. Because this area is where a lot of money is wasted, this should be your first order of business as a comprehensive plan to reduce your debt.
Instead of typing out exactly how to use the Paycheck Parking strategy, just watch the video below that explains how to use Paycheck Parking effectively;
Pay Highest Interest Rates First-After the credit card debt is eliminated, which is usually the highest compound interest factors of all debt, you need to focus on the next highest interest rates. Which of your loans has the highest interest rates? Usually car loans are the next highest as student loans tend to be low and things like medical bills usually have no interest rate tied to them.
Therefore, once all monthly expenses are paid for, take your leftover funds (that you are saving because the credit cards are gone), and put as large of chunks of money as possible towards the highest interest rate loan while paying the minimum’s on all other loans. Mathematically, this is the most sensible thing to do since the money that would be lost on a 10% loan versus an 8% loan is higher. *Note*-if you have a smaller loan that is at, for example 6%, but could be paid off easily, you can target this and just get rid of it. Sometimes these little “wins” are good for the psyche and may pay off further in terms of motivation.
One other note here is that if you do have any Compound Interest loans, pay them off first versus the Simple Interest loans as the Compound Interest is much more deadly because of how it is calculated.
Lower Interest Rates-If you have to put something on credit, hold off on the impulsive buy and do some investigation first. What is my best way of financing? What will provide the lowest interest rate? A good example of this is when purchasing a car. We go to the car lot of our choice, see the “car of our dreams” and will not leave the parking lot until we are driving away in this sweet vehicle. What ends up happening is we not only leave the lot gratified by the purchase, but are locked into a high interest rate, LONG TERM loan! Shop around because that original interest rate offer is NOT their only offer and the minute you start walking out, they are screaming lower rates and better payment options.
Most people want to fit a PAYMENT into their budget, which is good, but should not be the deciding factor. If I have the option of a $500 payment over 5 years, or a $650 over 4 years, I am taking the 4 years. Unfortunately, most people see the immediate $150 in savings per month and jump on that only to pay multitudes of more interest over that 12 month period by taking the lesser of the two payments.
Bottom line is; shop around! Find the best rate and lowest loan length possible. You are getting the same quality product, so pay the least amount possible.
Pay the House Mortgage Off-Once all loans have been paid off and you simply have your fixed & variable expenses left, start paying chunks of your mortgage down. What a lot of people do is they will SAVE the extra money in another account (and not use it for a vacation), and once a year, make a principal payment towards the mortgage. Make sure to identify, on the payment, that is it for “Principal Only” otherwise these mortgage companies will put it to your upcoming payments and not reduce your principal which is what you want to do.
You would be surprised at how many years you can shave off your mortgage by using this technique.
Increase Credit Score-As you go through each of the steps above, your Credit Score should increase. The Credit Score is affected especially when getting the credit cards down to at least 50% of total available or altogether eliminated which is just another reason to work on this type of debt first.
Since the Credit Score is largely calculated based on your debt to income ratio and total debt, obviously as the debt decreases, this score goes up. What happens when the score goes up? The interest rates you will be offered will decrease and, over the course of your life, the amount you pay to use money will decrease dramatically.
Many people ignore their Credit Scores. Don’t do that! We are not defined by our Credit Score, but just as money doesn’t buy happiness, it makes it a hell of a lot easier to function in life when the Credit Score isn’t in the tank! Therefore, one more step you need to take is to get a copy of your Credit Report and go through it. If there is anything on there that is incorrect, you need to take the steps to correct it. Nowadays, the Credit Bureaus have made it very easy to monitor your Report and change any inaccuracies fairly easily by using their online tools. Furthermore, make sure to get a report from all 3 Credit Bureaus; TransUnion, Equifax, and Experian.
Positive Attitude-I could write a 10 page essay on this, but will spare you for the moment; many have a very screwed up relationship with money because of how they were brought up; “money is evil”, “money is everything”, “we live paycheck to paycheck in this world”, or “money doesn’t buy happiness”. No it doesn’t, but sure makes life easier! We have to get to a place where money is simply a means to an end. The paper itself is not “evil”, it is actually neutral and we are the ones that add a definition to it.
One thing I have done from a visualization standpoint is create a better relationship with money. I grew up in a home where the fighting was about finances; to me, money was a PROBLEM. I had to untangle all that pent up emotion and realize money was actually there to serve my family and others. It could be used to better the world if used correctly.
Two things had to happen; I had to open myself up to abundance and, when spending money, had to think about the good that would come out of it.
If we aren’t at a place where we believe that we deserve abundance or a better life, no matter what we do, the needle doesn’t move because we subconsciously hold ourselves back. For example, my parents lived paycheck to paycheck, so I thought that was how life was supposed to be. In my adult life, I have had several jobs that paid well over six figures annually and what would happen? I would be living check to check. Not until I did some deep seeded work, was I able to break from that blueprint and allow abundance to flow into my life.
Secondly, when spending money, I am grateful for the ability to serve. Have you ever thought about the tip you give a waitress? I used to get all snarled inside that my bill was actually higher than it already was because of this tip. I know, selfish right? Years back, I started thinking about how the waitress would use this extra money; would it go to her kids? Maybe buy a meal for her family? What ends up happening overtime, is that the law of attraction kicks in and starts recycling these good feelings in the form of currency back to us. I know this sounds corny, but try it!
Increase Revenue Streams (2nd Time)-As your debt is eliminated and expenses go down, hopefully you have taken my advice on the first point, which was to generate another stream of income. To truly build wealth, we need to have our money working for us; our money is making money. Just as banks are able to have their money make money for them (interest charged to us), we are able to do the same although maybe not through charging interest, but purchasing assets that create residual streams of income.
What I have done is to build another stream of income through the residual streams that Oil & Gas can produce. I built my first business, a Network Marketing business, and AFTER I paid down the debt, could start investing in Oil Reserves. There are obviously many paths to take; Stock Market, CD’s, buying other businesses, etc. The point is to make the money work for you, not against you.
I consider myself a Financial Freedom Expert because; 1) I have the education to back it up (M.B.A., C.P.A.) and 2) I have done it myself. Therefore, what I want to do is help people that want a healthy financial life. I can help with all areas of the points discussed above including developing another stream of income.
If you would like to discuss how I can help you, please visit my website, The Balance You Need, and contact me. If anything, I hope you were able to gather some good information on how to reduce your debt and start getting into financial abundance. We do NOT have to live paycheck to paycheck!
Ben & The Balance You Need