Crushing Debt

In this episode, I discuss the main strategy I use to help clients pay off debt. I share insights on the importance of recognizing the weight of debt and the frustration that comes with it. I also provide steps and priorities for tackling debt, including building an emergency fund, prioritizing debt, and managing interest rates.  If you're looking for guidance on debt payoff strategies, this episode will help! 

Chapters

00:00

Introduction

01:27

Recognizing the Weight of Debt

05:26

Steps for Tackling Debt

08:23

Prioritizing Debt

10:08

Finding Extra Money

11:12

Paying Down Debt

13:48

Avoiding Credit Card Debt

15:12

Investing for the Long Term

16:53

Celebrating Wins and Tracking Progress

19:27

Seeking Additional Support

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Transcript

00:01 Welcome back to the Confident Dollar Podcast.Thank you for joining in today. I am excited to talk to you guys a little bit more detailed about paying off debt.

00:10 Now we've talked about paying off debt. I have a podcast episode where I've talked about this before but I did kind of talk about moregeneric two differentrules of thumb or or schools of thought when it comes to paying off debt and today were going to really dive in deep to a specific debt payoff strategy

00:27 that I use with clients if I was coaching you through it if we were doing one on onecoaching and working through your debt payoff this is how I would help you strategize around paying off your debt so I really wanted to give a little bit more tangible and a little bit more detailed information of just

00:43 how I would recommend you tackle and being able to move past having a lot of debt and just being in a cycle of debt first I want to kind of talk about and just back up for a second and just really recognize and realize the weight that debt pulls on puts on people and just the just weight that you carry

01:05 around on your shoulders when you are in a lot of debt. I have had so many client meetings where people come in very overwhelmed very stressed lots of anxiety because they have so much debt and they just don't understand a way out and they just can't see the light at the end of the tunnel when it comes

01:25 to being able to move past making good money but it's all going to debt payments and so it just feels frustrating and you just feel like youre just on this hamster wheel running in circles not getting anywhere because you cant break out of the cycle.

01:39 So I think its important to recognizethat I mean I fully understand the weight that that can carry for you.

01:46 This is where youre coming from with debt payoff and and this is where you are right now not really knowing what to do not really knowing how to get out of it and not really knowing how you even got into it in the first place and the reality is is thatsthat system is set up for you to be in this space

01:59 actually and so I dont blame youand I hope you dont blame yourself because you didnt know what you didnt know during those times and the reality is is that our system is set up to actually have you in debt and keep you in debt because there is no education around debt before you take anything on and 

02:17 that to me is a frustrating thing and where I get frustrated when it comes to our education system is that kids are not learning about debt whether its school loans or auto loans or credit cards which they should be learning about in high school because everybody gets a million credit card applications

02:34 when they start getting older and they're in college because credit card companies are looking to take advantage of someone who doesn't understand how credit cards work and I've heard so many numerous stories of people who do not understand how credit cards work I actually talked to oneand I hope she

02:48 doesnt mind me sharing this story but obviously wont name any names where she got a credit card in college and saw the credit limit and thought that was like how much she could spend like for free and so she bought pizza for like the whole floor of her dorm because she thought she had this credit limit

03:06 of what she was like almost like a gift card cause she had no idea no one taught her how the credit card worked and then she got her bill realizing oh she actually had to pay that the credit card but she wasnt paying that and that was her first hard taste and lesson in how credit cards worked so we're

03:23 not taught we're not set up to succeed in this way and so unfortunately so many young adults are getting out of college with a car loan, credit card loans, and student loans at least because no one told them to maybe go a different route when it came to school look at ways to save money and no one told

03:42 them, taught them how credit cards worked and they of course needed a car to get around so they take on an auto loan so not to you know obviously you are where you are and if you probably knew better and knew differently you may make might make different decisions moving forward or there's the people

03:59 that aren't even there yet they're in the cycle of debt they are where they are but they actually probably wouldn't even make different decisions moving forward because theres just a behavioral change that needs to happen when it comes to managing their money and if thats you I actually would recommend

04:12 you going back one episode to the money mindset episode and just listen to that and kind of try to understand yourself and how you view money before we're making big changesbecause I think it might be insightful for you to understand yourself okay but now lets get into debt and how we're going to strategize

04:28 so you are where you are you have a bunch of debt how are you going to get out of it and how are you going to pay this debt off?

04:35 Sothe steps that I also walk people throughI you know I've done Dave Ramsey's baby stepsI know a lot of my clients have come in and that they've done Dave Ramsey's baby steps and those are life changing and I know they've been helpful for a lot of people I do recommend it just a little bit differently

04:48 than he does with you know exactly which steps so my first step I would have you do is save your emergency fund three monthsso if you want more than emergency fund thats fine but start with saving three months of emergency fund before you start your debt payout.

05:01 The reason for this is a few things one I don't want you to have to get back into or add more debt because of emergency that comes up and I I feel like Dave Ramsey has you save a thousand dollars on that first baby step which probably was good when he started the baby steps but things are so much more

05:16 expensive than they were that a thousand dollars doesn't cover a car breaking down a thousand dollars doesn't cover a medical emergency not even close so I would say you need more than that so let's start with just three months worth of living expenses that you're going to start with your emergency fund

05:33 and then step number two if you dont have that start there so if youre ahead of yourself you do want to get out of debt but you do not have an emergency fund I want you to figure out three months of your living expenses so your mortgage, your billed utilities, your debt payments, your minimum payments

05:47 that youre payingyour food gas everything that you need to live off of for a three month period and I want you to save that and I want you to keep it in a savings account you can use a high yield savings account so you can get a little interest youre not going to invest it I dont want a new checking 

06:03 account because you will more than likely spend it so get it out of your checking account a little harder to access than being in your checking account but it's in a savings account and it's very accessible in case you need it and you have an emergency okay so that would be step number one step number

06:17 two now is we're gonna get into debt payoff so if you have your emergency fund at least three months great lets do debt payoff so your first thing you're going to need to do is assess your debt and you're going to need to write out your debt and i want you to write it out from highest interest rate to

06:35 lowest interest rate also include your monthly payment and your overall loan amount that you have ok so your principal loan now highest to lowest is more than likely so now you listed it out but now we have to kind of prioritize debt and this is probably where you're going to fall I would assume once

06:55 you listed out your highest interest rate is going to be your credit card so you have credit card debt hands down that is more than likely your highest interest rate Thank you. and so more than likely the one your going to be tackling first your going to have student loans, auto loans are going to fall

07:07 in like the middle category of interest rates and it probably depends on when you got them so obviously if you have an older auto loan its going to be a lower interest rate but if you have a newer one probably a little bit higher but your same with your student loans so probably fall somewhere around

07:20 similar categories but prioritizing one over the other I think that your going to want to tackle your student loans before tackling your auto payment per personally especially if they're a similar interest rate if your auto loan is way higher then let's tackle that first but if they're a similar interest

07:35 rate we're going to go after the student loans before we go after the auto loan and then again your mortgage is going to be on the lower priority side that's how I would prioritize them once youve kinda looked at your high interest rate to low interest rate okay?

07:51 This is not going to be fun and this is going to be I know if youre not a numbers person and your not someone who even really knows where all this are this is going to be kind of a headache for you but it is very important I want you to get this in a central location I want you to list it out now you

08:04 know and you know all your minimum monthly payments that youre making on every single one of those loans okay the next thing youre going to need to do is youre going to need to go back to your budget and look at your cash flow and see besides the minimum payment what extra money do you have to start 

08:20 allocating towards these loansnow if you don't have any extra money and you can only make the minimum payment that's not gonna workkinda give you the hard truth you're gonna have to figure out a way to either cut things so you have extra money or make more money you can knock it out of a cycle of debt

08:38 by paying minimum payments on credit cards that will take you forever and you will waste so much money so if you look at your cash flow and youre just like i dont have any extra money to put towards debt then youre going to need to either get really serious about cutting things and that means kinda having

08:55 to be a little bit more like intense about where you spend your money and maybe cutting some of your fund money and cutting some of the going out or eating out or those type of things to make some actual wiggle room or find a way to make more money side hustle something that you can now apply extra towards

09:14 your loans. Okay so now once you've kind of faced that hard truth and you've figured out I have this much extra that I can put towards my loans okay let's say it's $100 a month you're able to pay me all your minimum payments and then you have extra $100 a month put towards your loan youre going to put

09:33 that against the highest interest rate loan top priority that youve listed on your sheet okay youre also going to need to make sure that the entire amount that a full 100 dollars is going towards the principal of that through if you don't have a way to make an extra payment that you know is principal

10:06 only then I would call the company and I would ask them how do I make a principal only extra payment and they will give you those instructions and sometimes they don't make it easy to do they make it super obscure and random and obviously thats you know their way because they dont want to you know I 

10:24 want you to pay off your principal early and so you might have to do a little bit of digging to figure that out but I want you to then put every if you have a hundred dollars every month figure out how you put that towards principal only and put that towards the principal now just to backtrack for a 

10:36 second if youre not really sure what principal means the principal on your loan would be the amount that you initially borrowed so if you borrowed fifteen thousand dollars for your car that is the principal of the loan now you have an interest rate that you're getting charged on that and then you have

10:52 the interest that you're paying so every monthly payment is going to be broken up of certain amount goes towards your principal and the certain amount is interest only when you do loans okay so you want any extra payment to go towards the overall principal or the cost or the amount that you borrowed 

11:09 so youre paying that down quicker and that will have you pay less interest hopefully that makes sense so i want you to make sure that extra payment is going towards principal okay so now you are doing all minimum payments you are putting anything extra that you have any time you get extra money maybe

11:28 every month looks different i know so maybe in the sub months you have more extra than you did the previous and youre gonna put that towards that principal only and youre gonna work on paying down that highest interest rate which is again more than likely your credit card once you have that paid down

11:43 and paid off you are going to then put all of that minimum payment you were using there plus the extra you were paying and youre now going to apply all of that towards your second priority loan okay so if again if the minimum payment was $100 on that first loan plus you're putting $200 a month towards

12:03 it you now have $300 a month plus the minimum payment you were already using on that second priority loan that you're going to put towards that loan but again youre going to call that loan company whoever thats through and youre going to say I want to put this $300 extra towards principal only I dont

12:20 want it to go towards interest this is a principal only extra payment because your minimums covering your interest ok and youre going to do that process until youve worked through all of your loans now again I said we were kind of going through loan priority I want you to pay off high interest to low

12:38 interest and youre kind of wondering ok but do I pay off every single loan I have because you probably have you know if you have a mortgage again you have an auto loan are those things that you also have to prioritize paying off before youre investing and I would say noanything I would say youre going

12:53 to you need to you definitely need to get your credit cards off the table that you cannot have credit cards loan and you should never go back into credit card debt again because that is the you pay so much astronomical interest rates 29% 27% I mean just way too high of interest that youre paying on credit

13:09 cards so you definitely need to get those out of the way and I would say again working towards student loansbut if you have an interest rate anything under about 7% or 6% range anything under that I think that you start youre paying off your debt while youre investingyou dont need to prioritize paying

13:27 off every single piece of debt before you do any type of investing because that could take you a really long time and if you can make more market money in the market then then you are paying an interest like if your interest rate is lower 4% percent you can make more money in the market.

13:45 average return for the S&P 500 is about 8% 8-10% depending on kind of how the length of spend you look on and who you talk to and so if you can average in that range you're going to be good so you're making more money than the interest you're paying on those other loans if that makes sense okay so once

14:06 you get to anything below about 6% I want you to probably start splitting you're still doing debt payoff and they're still So I'm for your long term savings and so you get into a Roth IRA or your 401k or traditional IRA and you're going to start investing for the long term while you're also handling 

14:38 the rest of those lower interest rate debts. Okay? So say that I do not prioritize in paying off early at all is your mortgage.

14:49 this is because most mortgage rates do not make any sense to pay off early because your interest rate is so low that you would make so much more money in the market if you put all of that money towards your long term.

14:59 Investing then paying it off so if you want to pay off your mortgage that's fine but I want you to understand that the numbers on that do not make sense if you have a low interest rate especially if you bought when interest rates were super low so your interest rates like you know 3% or the twos that

15:14 does not make sense at all money wise, numbers wise that does not add up so understand that paying off your mortgage in that capacity is much more of a behavioral finance thing of just wanting to be debt free fully debt free or be able to apply you know that money elsewhere where not have to have that

15:31 every month it doesn't really make sense as far as opportunity costs when it comes to your money okay so as long as you understand that that's fine if you still want to do it that's fine numbers wise it doesn't make sense it makes sense to put that money in the market instead but if that is a part priority

15:46 of yours thats fine i would just say that the lowest debt priority on that list okay so finally i think its really important because debt payoff is again we talked about debt is stressful and has so much things that you need to into debt pay off and its a ton of work and its a ton of discipline and so

16:07 you need to find a way to celebrate the wins in your debt pay off journey so whether you know i'm not saying obviously not celebrate so big that you go back to more debt but celebrate in a way that when you pay off one of the debts do something to recognize that and celebrate that you were disciplined

16:24 enough to get out of that debt okay so i want you to celebrate your wins i want you to celebrate those milestones as youre going through it because youre mentally going to need that to get through debt payoff it is tiring it is gruesome it is exhausting it has a lot of stress you have to deprive yourself

16:41 of things that you would otherwise like to have but youre trying to put it all towards debt and so i understand that and so i do think mentally it's important to celebrate those wins you are going to have to say so disciplined outside of that that you just need to have those milestones recognized if 

16:59 you and then i would say its tracking it and its seeing it visually some people like to color code or see like you know charts of like coloring it all the way up where its finally gone but do it in a way that you mentally works for you in your personality and where you can see the progress over time 

17:18 because you do need to mentally be able to track your progress and see your progress in order to be able to like stick with that discipline that it requires.

17:29 So this is a lot right? Its a lot to tackle and its easy to talk for 15 minutes about this and okay good luck go ahead and go do that but we know it takes a lot more effort.

17:37 And a lot more you know focused like just intensity than it sounds like and so I just you know I want you to recognize that just that taking the first step of figuring out how to do it is a really good first step and give yourself grace as you're working through it you're gonna still make mistakes and

17:55 and you might still accidentally overspend and so you don't have as much that month to put towards that debt but you are making progress by just addressing it instead of living with blindfold ona blindfold on and you know trying to pretend it's not even that there so I do admire you and I commend you

18:08 for that cause that is a first hard step to take and even just write you know listing out your debts like alright here we are gonna do this thats a hard step to take and so good job on just getting to that point and good luck as you are working through so and then I think it is important to also recognize

18:22 that there is going to be a lot of people that this is hard to do without accountability and so I do offer accountability in this capacity and coaching for people who just need help Who needs, a second set of eyes or is this another person to bounce questions off of and so if that is your personality

18:40 I know it's like well then I'm paying for something that you know I I already have debt and I'm paying for something of service to help me get out of debt but sometimes for some people the cost of that is it doesnt even compare to the freedom of getting you out of debt that you might not otherwise be

18:56 able to do without some accountability and some help so if that is you please 
dont hesitate to reach out because I am happy to help walk through that with you and sometimes thats needed so I hope this is a little bit helpful to give you just some guidance on just what I would recommend in getting yourself

19:12 out of debt I know some of these are trying to be pretty I do try to be pretty just grounds level of just foundational financial planning and personal finance and just understanding how these things work because I know a lot of people just don't haven't been taught that and so I hope these are helpful

19:28 for you and definitely stay tuned for further episodes it is helpful for me and this podcast to reach more ears if you do subscribe so if you subscribe thank you and if you also would love to leave a review that would be great too definitely want to spread the love and just have other people be able 

19:45 to learn more about getting their finances in order and just building confidence in their financial life so thank you again for tuning into this episode of the confident dollar podcast and we will see you next time.