This is one in a series of 10 posts to help you get, and remain, financially healthy. It’s best to start at this post. [click here]
If there is anything that will keep you from building wealth it is debt. Think of debt this way… you’re a track star running the race of your life. However, just before the race begins you are given a 50 pound backpack to wear while running. Just as the backpack will slow you down so will debt.
Here’s how to take inventory of that debt:
Make a list of everything you owe money on; mortgage balance, car loans, credit card balances, and/or any outstanding student loans. Make sure to include everything. Next to each item write down the payoff balance. Next to that, write down the annual interest rate for each item. Lastly, write down how much per month you are paying on each loan.
Now that you have your list, the next step is to pay these debts off as quickly as possible.
Some people suggest paying off the highest interest rate loans first. Others suggest paying off the smallest balance loans first. It’s true, one these techniques might be mathematically better than the other, but the important thing is just getting started. Don’t split hairs at this point, just get a plan and pay off your debt.
You might ask… where do I get the extra money to pay off my debt? Here are a few suggestions:
Look at your “Plug the holes” activity. Did you find some areas where you can cut back on spending? I hope so. Now, take those dollars and apply them to your debt plan. Instead of overbuying for all those unneeded items, use that money to wipe out debt.
Sure… go ahead and treat yourself every now and then but seriously… keep the spending down on those frivolous items. When you get your debt paid off (excluding your mortgage… more on this later) then go ahead and load up on those coffees and stuff.
Get a second job. Wow… what a novel idea. Please listen closely. If you’re in debt and find it hard to make ends meet each month because of your debt, then you’re fighting a losing battle. Get humble and get to work. Trust me… when you pay off that debt life will be less stressful.
About the mortgage: Yes… you should plan to pay this off sooner than your typical 30 year program. But this takes longer than a few years. So, the main point here is to get rid of your smaller consumer debt like credit cards, merchant cards, car loans and such.
When you do this you regain your resources (i.e., your money). Afterwards, you can pay off your mortgage quickly with the extra cash flow. Furthermore, with that extra cash flow you can begin building your own personal wealth through investing.
Okay… if you’ve been following along, you’re starting to get a plan in place. Next, let’s create a special savings account for emergencies and other stuff.