She recommends putting everything on the table, including credit cards, car loans, student loans and even the mortgage — though consumer debt should be your first priority. How much do you owe on your credit cards and other consumer loans?
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How much do you spend each year on interest? How much of your monthly salary goes toward that debt? Step two: Get to the root of the problem. If that is part of the dream, you will be giving up that income, so list that along with the rest of your expenses. Again, put the highest-priority items at the top of the list, and if it makes sense to do so, include multiple price options. We are working on getting to the income your lifestyle will require, so we need to work out a timeline for those one-time expenses.
In general, the latter option is the preferred choice, but for smaller expenses, you may prefer to pay cash. Whichever option, you now have a soft deadline for each. For those things, you plan to pay for outright, count the number of months until your deadline, then take the cost and divide it by the number of months. If that amount is beyond your current budget, you may need to start small and work your way up. And no matter what, there will always be unforeseen expenses for many of your dream experiences.
Prepare for this by adding a little extra to the budget you calculated. The extra cushion also means you can be a bit more spontaneous, too, so keep that in mind. Knowing where you are starting your financial freedom journey from is critical, and sets the pace you need to keep up to hit your goal. This is a simple but necessary step.
On the liability side, you need to know how much you owe. The total number is important, but the separate pieces will be more useful to us. Debt is an extremely useful tool. Unfortunately, many of us have abused the tool and amassed high-interest debt that sabotages our chances of getting ahead. If you have racked up a mound of credit card debt, eliminating it needs to be a top priority. Not all debt is bad, of course. Good debts are those that make you money.
And credit cards are worst of all. Not having a bit of cash on hand means that your efforts at getting out of debt can be easily derailed by unexpected or emergency expenses. Two of the simplest get-out-of-debt strategies are referred to as Snowball and Avalanche. Each has its advantages, but the one you use is less important than committing to it.
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Pick one and stick to it. The Snowball Method works on the smallest debt first. People who use this method like that you see quick results. You get rid of the small debts fast, and by doing so, you free up money to pay down those larger debts. The Avalanche Method works very similarly, except that you will prioritize the highest-interest debts instead of those with the lowest balance.
It can take more time before you get rid of that first high-interest balance entirely, but once you do things progress relatively quickly. The very first person to get a slice of your pie should be you! This one is counterintuitive to many people.
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What many financial experts suggest instead is to set aside money for savings and investments before you pay your bills. Ideally, this should be automatic. Your bank will most likely allow you to set up automatic recurring transfers to savings. There are also online investment services that allow you to schedule regular deposits from your bank account. This should be a high priority, even above paying off credit cards. No one can predict the future, and emergencies can ruin a family, financially. This is money that you do not touch unless it truly is an emergency.
Do this before you start to tackle your debt. The higher priority, though, will be investing. Contribute something, regardless. Most online brokerage accounts will allow you to set up automatic deposits, so be sure to do that. If paying for college is part of your plan, there are tax-advantaged investment accounts designed for that purpose. A College Savings Plan is generally the preferred option, and works similarly to a Roth IRA—contributions are made after tax, but investments grow tax-free. Goals are dreams, with an important addition—deadlines. An emergency fund can be like an all-purpose financial first aid kit.
Now give yourself a deadline for each goal. Write the dates in your calendar. The dates you choose should be hard commitments that you will work towards without compromise. Now set a goal date for each of the things you already know you will be doing. You might already have a date planned for some. Looking at the budget for those definite plans, does your initial deadline make sense? You will be working to get the income you need, so you can keep those deadlines in place and commit to making it happen, or you can decide to extend your timeline.
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Be very honest with yourself, here. It helps a lot if you can discuss your plans with someone else who knows you well. Humans have a pronounced tendency to overestimate what they can accomplish in the short term while underestimating what they can do over a longer timeframe.
People who know you really well—think siblings, parents, and lifelong friends—will often have better insight into your patterns then you yourself. This, for most people, is the biggest marker of financial freedom—the ability to walk away from a regular paycheck. Because of that, this goal is one that is very likely to need revision. This is a step that you will revisit regularly—at least annually, and probably more frequently in the early stages.
You are now paying the minimum amount due on the second card plus the total monthly payment you were paying on your first credit card. Continue this process with all your credit cards and other consumer-credit debt. With each debt you pay off, apply the full amount you were paying on that debt to the minimum payment of your next debt. As you pay off each debt, the monthly amount you are paying on the next debt will escalate. Once all your credit cards and other consumer debt are paid off, continue the procedure with your car and house payments. If you follow this procedure, you will be amazed at the shortened amount of time it takes for you to be completely debt-free.
Most people can be debt-free within five-to-seven years. Now that you are completely debt-free, take the monthly amount you were paying on your last debt, and put that money toward investments. Build your asset column, even using good debt.
Here are 5 simple steps to help you eliminate your debt pronto
Contrary to popular belief, debt is not something to be afraid of. Rather, it is a powerful tool to build wealth, when used correctly. It wasn't easy, but it was simple. The process required a lot of sacrifice at first, but following the simple six-step outline paved the way for the past two decades of financial freedom. Now it's your turn. Get started today on your path to paying off your bad debt and invest in your financial education so that, when ready, you can harness the power of good debt to grow rich. Is There Going to be Another Crash?