Make A Plan

Reducing debt start with having a plan. Writing it down and following to the letter. Anything else is not going to work to reduce debt.

Article Link:
https://www.consumerfinance.gov/about-us/blog/how-reduce-your-debt/ By Courtney-Rose Dantus

Transcript

Charles McDonald: 0:01

Hello, I'm your host, Mr. Chuck, a retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination, make a plan, reducing debt starts with having a plan, writing it down and following to the letter. Anything else is not gonna work to reduce that, before I get into what a debt reduction plan is management plan, there's two things you need to have at this point. And that is what's your long term goals, what you want to get in the next five to 10 years, maybe it's a home, maybe it's have children are getting married and have children, maybe would be to buy a sailboat, or whatever the case of summer home, you're not going to achieve any of your long term goals, if you're bogged down with paying debt, whether it's student loan debt, which many of us have credit card debt, first, second, and third mortgages, a couple car payments, that's, that's gone the limit on what you can do, not only while you have that, that, it's gonna limit it to what you can do on a day to day basis as far as your entertainment or what you want to do is going to limit you on saving money, which is got to slow down your process of meeting your long term goals. So set some long term goals because you need to have a reason to reduce this debt, you need to have a clearer picture of why you're gonna do it. And you focus on getting it done, so that you can look forward into your future and meet your goals, whatever they may be. If you would just go online and do a search in your browser. For debt reduction plan, you're gonna find maybe a couple articles that talk about how to do it, that doesn't really tell you how to do it, they just tell you, you know, you have the Avalanche Method, which is the high interest rate, and they all had the snowball method, it kind of explains them. That doesn't tell you how to do anything. It's not really a plan. It's just a description of the process of a plan. The high interest rate method focus on your debts with the highest rate of interest, such as credit card, hopefully your student loans or don't have high rates of interest, your car should have high interest, but the goal is to pay off your high interest debt first as quickly as possible, because it's costing you the most money. While it may not feel like you're making presses method can help you eliminate your most cost C list. Debt first, which can save you money in the long term, the snowball method approach focus on your smallest debt that you owe to smallest balance. The goal is to get rid of as soon as possible you keep on making the minimum payment and all your debts and you put any extra funds you have towards paying off the smallest debt. This will help you pay it off sooner. This is probably one of the only places that tell you to make the minimum payment on all your debts. In that spot, the only place you're gonna read that or see it once you paid off the smaller debt in full dedicate the freedom money to the next smallest this way you create a snowball payments as you eliminate each debt, unlike the higher rate of interest meant that you see progress quickly as you pay off smaller debt. However, you may end up paying more in the long run as you won't be focused on the larger or more costly debt. Then step two is that when you get to, they want you to choose the method high interest or snowball create your debt reduction plan. And they have a worksheet and it tells you which method and then it's got a select a method and then it has a little spreadsheet in there where you list your debt. The total amount that you borrow an amount still owed. The total amount borrowed is not that important, but the amount you still owe is important. Your monthly payment extra payment payment due date, date paid off in full, I don't know what's going to help you, it doesn't give you a rate of interest. So he doesn't help you decide which one to pay, it does give you an amount still owed. But that's only at the point of time you make this up, it's okay. It's a way to organize your debt, that is a good thing, then I want you to organize your monthly bills understand what you owe, and when so basically, track and do a budget. So we already talked about that. So if you would do a search on debt reduction plan, it's gonna give you a little bit of information, but it's not Tonya, what you really need to know. And that is what to do and how to do it. It gives you some methods, which, that's fine to know. But how's that gonna help you in the long term may help you if you're smart enough to figure out? Well, I want to pay off my high rate of interest first, because that's cost me the most money. But that card may have the largest bounce on it. And it's gonna take a lot longer. Or you pay off the smallest debt and am I had the lowest rate of interest? Well, you pay it off real quick, but it's the one that cost you the least amount of money. So what do you do? It is confusing. This is what you need to do. You're doing your tracking, you have an app, you're doing you're tracking, you're creating a spreadsheet, or you have an app that does your tracking in your budget or one. If you're using software, to has your tracking as doing your budget. Take the time to watch through YouTube videos. Learn how to properly use that program, or will not do you any good. Watch multiple YouTube, understand what they're talking about. Get to know that software and know it inside and out how to create reports how to create a budget, what to do with your money and what to put in there, what not to put in there, I highly recommend that you manually enter all your information. Why? Because that makes you more aware of what's going on in your personal finances, don't download it from the bank, it may categorize something wrong. It may be different categories than what you're thinking. It may put them in there twice. I mean, there's all kinds of things that could go wrong. So manually enter everything. As what I highly recommend. It keeps you're more aware of what's going on and your spending and your budget and your income keeps you more aware when things are due. It just makes you more aware overall, and your personal finances. And that's probably one of our very first goals. Be aware of where your money is gone. And when it's due when the bills are due and how much about it, you don't have to have it to the penny. But about how much is do I know I pay around 80 to$100 for electricity every month. I know my gas bills$80 $90 In the winter, and 20 or 30 in the summer time. I don't have any loan payments, I know I pay about five $600 A month towards a credit card. From my I use a credit card as a way to make payments or to buy things online. And it's just a transfer of money. I pay them off every month. I don't ever pay any interest. I don't pay any fees. So it's not really cost me anything. It's just a tool of convenience. So if you have your long term goals figured out what you really want, you probably understand if you have two or three credit cards with a couple 1000 balance age, I think the average credit card balance in the United States is like $6,000 or something which that's expensive at 20 right 20% rate of interest that's really gets expensive. So a fee no you're struggling are few got that student loan debt that's preventing you from borrowing money to get the house you want or preventing you from doing things in your life to meet your goals that you're planning on doing. And that's what's holding you back. You need to focus on Ms get this stuff taken care of and out of the way. So this is how you're gonna do it. That reduction plan. This is what you follow and we're Write it down. One, quit using credit to make the minimum payments on all your debt three, start or increase your emergency fund your marches, see funds should be a minimum of $1,000. For once you achieved the minimum amount, continue to build your balance to $4,000.05. Take the amount over your minimum 3000, minimum 1000, apply it to one of your debts, whether you're using the avalanche snowball doesn't matter. This is what I recommend, pick up card one of your debt highest rate of interest, a high rate of interest anything above a percent higher rate of interest, pick the one with the smallest balance and try to pay it off. If you didn't pay it off, pay it off the next time. But if you did take anything and access that you still have in that 3000 and ply it to highest rate of interest. Now let's go back. And then you just keep continue the repeat the process. Let's go back. And the first thing you got to do is get your dad organize, make up a spreadsheet, he needs to name unpaid balance, then the minimum payment, the due date, the rate of interest. And if you do in a spreadsheet, you can then highlight it all and do a sort and put it in the order of highest rate of interest. Or you could put it in the order of highest balance, lowest balance, what whatever. And that will be right there in front of you, you can look at it. And you know exactly what's going on. If you bury your head in the sand, and refused to look to see how much you owe, you're just kidding yourself. He got to know how many credit cards you owe what your student loans you owe how much the balance minimum payments are. And what's the unpaid balance, that's gonna give you a good idea about how long it's going to take to pay them off, pay them down and pay them off, then you're going to quit using your credit cards. Your This forces you to live based on your net income, you're not gonna spend more money than what you make. So if you don't make enough money to pay your rent, utilities, groceries, gas for the car, car payment, you got to change something. Whether you get rid of a car and buy a lesser expensive car, get rid of that loan, or maybe find a place that don't cost this much to live. You've overspent somewhere in one of your categories. So that's where the budget comes in handy. Remember, I said do you do percentages by category? The total for housing category? What's that costing you? If it's 50%, that's half your take home pay? And then what's your transportation 25% That's 75% of your take home pay that domain leaves at 25% to pay off all your other debt, buy food, put gas in the car. Well, that's all included, but and to increase your savings. So if you're wondering why you're not getting ahead that it probably would help you understand your finances and where you probably went wrong or got led astray. If your credit card payments, the minimum balance is 30% of your take home pay that's just cutting in, though. Other places where you need your money to live. Your needs to pay for your needs, or to pay for your wants. And maybe you know you only you know what caused the problem. Maybe you have a spending problem. Maybe you were unemployed for a while. Maybe you just have a job that doesn't pay that well, maybe the career don't pay as much. Maybe nobody's hiring. I mean, I don't know. Maybe you live in an area where housing is super expensive, and you're not making enough to even cover your housing. And maybe it takes two people to pay for your living expenses. And your spouse had a child and she quit working I mean, only you know where why you're in the situation you're in, you have to be focused on your spending. And the only way to get your debt redock reduced, and in a fastest way, is to control your spending, reduce it wherever you can, and use it to build up their emergency fund and apply it to whatever debt you're wishing to fix. To get rid of the quit using credit, it has gotten to be probably one of the hardest steps. And that could take you two or three months in order to achieve that. So in your goal, you write down, quit using credit and you put a date, when did you make the goal? Okay, in the first month, you didn't use any credit, right that month, down, you achieved step one, now you continue doing that, okay, make the minimum payment, well, that's an easy one, because you can do that the very next month that you make the payment, so write down the month you achieve that. That's the goal years set, write down the date that you got your$1,000 build up in your savings account that so gold that you achieved, continue building it up. Now, why am I telling you that and why don't we just take the extra money like two or $300 a month or whatever it may be, and apply it to one year debt, instead of keep making the minimum payment, we have the when making the minimum payment, I'm never gonna get my debt paid down. That is what you hear from everybody. Don't listen to them, that they are meant to admit they are right. But by applying$50 a month, or $100 a month, or$150 a month, to a debt that's doing two things, it's gonna hurt you. One, you're gonna pay down that a little bit. But it won't make that much of a difference. And two, it could short you on cash, you need to pay for gas or groceries, that will keep you from using credit. So it's all working together, this plan all works together, a you have to do every single part of it, for it to work, if you say I'm not going to make the minimum payment, well, you can quit using credit, okay, you're not going to build an emergency fund, if you do, we'll take a whole lot longer. And we're gonna get into the reason why you need that you're not gonna be able to put a lump sum payment on any one building out a lot faster. It just works a lot slower than this particular method. The reason you're building an emergency fund, and it's like the majority and know what the percentages of people in America, if they have an unexpected bill, they're unable to pay $400 or more $400 is nowadays is not gonna buy you a whole lot, maybe two or three tires, if you need tires on your car, not much $1,000 What that's gonna do for an expected event event that happens that's gonna cost you money is gonna help you with number one, quit using credit is going to help you from using credit to get out of this financial problem. And why are we gone increasing it to 4000? Well, because the longer it takes you to do that bigger the emergency fun you're gonna have so if something unforeseen happens, you have more money to use so that you don't have to use credit because if you using credit, you're not reducing your balance you're increasing your balance and that balance will never go away. The time you buy something charge it entrusts tacked on you make a payment and there's a little bit more less of the payments going to principal and that's where you're coming from. How's that been working for you? Oh this stick to the plan. So it's not if it's gonna happen is a matter of when an unforeseen events gonna happen. In your budget you have most everything accounted for your mortgage or your rent, your utilities, your car payment, your grass, your groceries, a little bit for clothing, some entertainment all That is accounted for, try to stick to that. So that you that access income, what's really not access, the income that you don't have to spend for your needs and once is going into your savings is gone up, build up your emergency fund, the bigger amount of II can do, the faster that will build up, the more faster of builds up, the more you're gonna have sooner, then the sooner you're gonna take that $3,000 and apply it to one year debt, and then it's gonna build up faster, because if you can pay something off, now you have more money freed up, that minimum payment amount, at the very least, is gonna be freed up to increase your savings that much faster. And over time, while at the beginning, this is a fairly slow process, quit using credit is gonna may take you a while to build up that first $1,000 might take you a while in and up to 4000 it's gonna seem like forever, six months, nine months, am I getting out of debt, it's taken me forever. But as you keep doing the same thing over and over, you pay off one debt, you pay off the second debt, you pay off the third one, this process is speeding up is gaining momentum, his balls getting bigger as it rolling down the hill, you seen the cartoons, snowball at the top of hills real small, as it rolls down hills getting bigger and bigger. Well, this is the same thing with the momentum of you're paying off your debt, it's getting bigger and bigger, and faster and faster. And then over time, as your debt is decreasing, you're gonna increase your emergency fund from 1000 minimum, maybe your increases to 1250. And then you increase it to 1500. And then by the time you're all your credit card debts paid off, in may be 2000. And then time your student loan debts paid off. Remember, we're gonna be working on paying off the highest rate and mentors first, student loan debt shouldn't be that expensive. It may be a lot depending on how long you want the college and what your profession. But the rate of interest should be lowered in your credit card. The let's talk about getting a loan consolidation that is not part of this plan. Getting a professional counselor to help you negotiate new balances and reducing that's not part of this plan. You're doing this all on your own by keep getting control of your personal finances, and keeping control of all your personal finances. I'll be back in one moment with my final thoughts. If you're interested, and the software that I use personally, to reduce my debt, I have a link in my show notes, shop financial.com, copy and paste it. And it will take you to the website. If you are looking for any spreadsheets or other information that I talked about from time to time, I have links and my show notes. And I always have links to the articles I refer to and my show notes. Plus other things like the happy draft.org which is a another organization that helps you with your debt. So feel free to go to my show notes and link and check out whatever I'm putting out there. I appreciate it very much. If you would like to make a contribution to help keep this alive, then I would gladly accept that. It's in my show notes. Thank you very much. So let's start. This is what you need to write down. One, quit using credit to make the minimum payment. Three, have an emergency fund, minimum 1004. Increase your minimum up to 4000. On your savings, five, apply the excess over your minimum to a debt. Six. Repeat. That is all you need to know I think if you listen to my explanation, you know what to do. Follow that. Make a counter write down To date, see how long it takes you to do it, that whole cycle the first time? The second time? How long does it take you to do this cycle? And make the 10th time? How long does it take you to do this cycle, this is what I did. It was slow at the beginning, I didn't think I'll ever happen. But I kept the faith. I kept working at it, I looked for ways to reduce my spending, I actually increase my income also, I changed jobs and got a better paying job. That helped a whole lot. And I looked for ways to reduce my spending. And one of the ways was I got rid of paying for cable TV and I start streaming I saved a lot of money there. Another way was I got rid of my carrier from my cell phone and found a lesser expensive one. And I save money there. I look at different my insurance. Now I have a certain limit that I actually need and want for my homeowners, my car insurance and all that kind of stuff, protect myself, but I compare insurance companies and I make sure they have a good service for what I'm paying and that I got a reasonable price. And and I'm not over paying for anything, I made sure that I didn't weren't paying for subscriptions, and anything that I don't use on a monthly basis. I don't like having anything that I have to pay for every month, whether it's computer software, which are getting bad at that specially Microsoft, whatever it may be, I try to avoid our monthly on with a never ending B where you never pay it off. I don't do that. Because that's a waste of a lot of money. If you forget about it, you quit using that service or that product or whatever it was and you forgotten about it, you're still paying for it. What are you why? Why are you paying for it, cancel those things, get rid of it, find ways to do the same thing a lot less expensive, and you will get your debt paid off. I paid off about $135,000. And it took me three years and eight months, the first year and a half, two years drag on took forever. But when I got down like credit cards were paid off, my cars were paid off. And I got that blue line of credit and my pay down I was working on my first mortgage. It was like I was making three mortgage payments a month. And I'd make my and when you do this, when you apply that extra lump sum, do it after you make your minimum payment. So if your minimum payments due on the 10th of the month, don't use that total lump sum to make your minimum payment, pay the minimum payments. So let's say you have a credit card, the minimum payments $75 Your use, you pay the $75 First, from your checking account. Once that's clear. Now you don't have to make another payment for 30 days, but you have the excess amount of money and you want to use it. Now we take that excess why it and make sure you apply it all as principal because that's gonna reduce that bounce down your interest is what they're going to charge you for interest will drop way down, and then your minimum payments gonna drop down. You can do two things, keep making the same minimum payment for that particular debt until it's paid off. Or reduce your minimum payment amount, increase your savings a little bit so that you can now apply a lump sum again, maybe a week or two sooner. I hope that comes across and it's understandable that write everything down. They everything as you complete the process. As the progress price process is repeated. It will start to speed up and may take a while don't get discouraged, stay focused. And if you can increase your income that's gonna help if you can decrease your spending that's gonna help. Whatever you can do is gonna help this program works all together and then everything is dependent on everything else so if you don't do part of it it's gonna screw up the other part so stay focus stay on track and you'll be glad you did so