Debt Elimination

A Practical Approach

Debt Elimination A Practical Approach

Debt Sucks
Debt limits your opportunities. How would you like to pick up and move across the country, or maybe just closer to relatives, or to the beach, or to the mountains? Perhaps you would like to make a career change, go back to school, or take that international assignment for a couple years. Forget about it. You are in debt. Debt forces you to put up with more crap. Debt forces us to put up with bad jobs, poor living conditions, broken down cars, and disappointment. Debt is the last thing you think about each night. Money problems is a leading cause of insomnia. Instead of drifting off to sleep counting sheep you lie there thinking about your bills. You obsess over it. You worry over it. Debt plays by its own set of rules. Dont believe me? Try carrying a large balance on a credit card. One month your statement reflects an APR of 6%, the next 29%. What did you do to deserve it?

Debt Elimination A Practical Approach

Debt Sucks
Debt eats away at future earnings. For every dollar you pay in interest on debt it is a dollar that could have been spent on something else or invested, and a dollar taken away from your earnings. Debt can make you desperate. Desperate times call for desperate measures. Being neck deep in debt can make some people do things they normally wouldnt think of doing. Debt affects your entire family. Kids may not fully understand the financial ramifications of debt, but they recognize Mom and Dad sure fight about money a lot. They dont know what debt is, but from listening to you they think theyll always be in it, and being in it must be bad. Debt is a lousy employer. When you are in debt, and most of your income is going towards bills you might as well consider yourself working for the debt.

Debt Elimination A Practical Approach

Debt Sucks
So why do we do it? Were clueless. We know the consequences. We know what being in over our head does to us, but we continue to charge away We want nice stuff. We work hard, we deserve it, right? We need to keep up with the neighbors Emergencies The internet made me do it Its easy because I dont have to pay for it now. Instant Gratification!! We thoroughly enjoy stress and disappointment in our lives

Debt Elimination A Practical Approach

Is There Any Hope?

No. Youre Doomed. Just Kidding. Of course there is, but it is going to take some work on your part.

Work?
Oh My God! You mean I have to work at this?

What Do I Need to Do?

Have a Plan Have a Goal Talk to your Significant Other Buy In Discipline Sacrifice Expect the Unexpected Learn to Save Money Stop Using Credit Cards

Debt Elimination A Practical Approach

The Hard Facts

There are a number of ways to get out of debt. Some work, some dont. It all comes down to you, your attitude and your actions. Debt Consolidation Loan - Helps if you have lots of high interest debt. Doesnt get you out of debt, it just crams a bunch of debt together with (hopefully) a better rate. Problem with this is, most people get a consolidation loan and go right back out and start creating more debt! Now you have the original debt PLUS the new debt. Not a good plan unless you are very disciplined and stop creating more debt. Debt Reduction Companies Most of these are a ripoff, trying to convince you they will contact all your debtors and settle your debts for half off or more. Truth is they will charge you a premium for this or just keep the money you send them and disappear. Even if you do find a reputable one, your credit will be damaged because you are not paying full payments or your account has been settled.. Both have a negative impact on your credit rating. Debt Counseling - Not a bad idea for some. There are legitimate companies out there like Consumer Credit Counseling. But, again, since you are making reduced payments your credit rating will be damaged. And, like the plans above, you are not taking control of your money. You are not learning anything. You are not changing your behavior.

Debt Elimination A Practical Approach

Taking Control of Your Money

The only legitimate way of getting out of debt FOR GOOD is to change the way you think and change your spending habits. Buy for need, not for want Dump the credit cards Start saving Keep track of what you spend your money on Create a budget and stick to it Visualize and believe - picture yourself debt free Stop being a victim of debt Snowball your debts

Snowball my Debts?

Debt Elimination A Practical Approach

Debt Snowball
Coined by Dave Ramsey, snowballing your debts is a fairly easy concept to understand. It is much harder to keep it rolling. Concept: Pay the minimum payment on all your bills except for one. Usually the smallest balance or the highest interest account depending on your method. Result: As you make payments, the payments on the paid debts are added to the next debt in line and, like a snowball, gather more payment money as the debts are paid off. Steps: There are Five Steps you need to take on your journey to Financial Freedom and Debt Elimination.

Debt Elimination A Practical Approach

Step One
Gather all of your bills together. Dont include reoccurring monthly bills like your utilities, gasoline, food or insurance in the debt snowball. Use credit card bills, loans and mortgages only for now.

Step Two
List the amount you owe for each debt. You can arrange your list any way youd like. Most list . debts in order from the least amount owed to the most. This will allow you to see results quickly since all your smaller bills will be getting paid off first. You may also opt to arrange your list with the debt carrying the highest interest rate first down to the debt with the lowest interest rate. Although this is probably the best way to save the most interest in the long run, it doesn't provide you with the psychological advantage of seeing your bills eliminated quickly up front.

Step Three
Create a budget for all of your monthly bills--including utilities, gas, food etc.--along with the MINIMUM PAYMENTS due for all of your debts. Dont forget to put some money in savings!! Once you have budgeted for those amounts. Look at any extra money you may have. Put that extra money towards the Snowball Plan.

Debt Elimination A Practical Approach

Example
So, lets say you bring home $3000 per month and your credit related bills (mortgage, loans and credit cards) have combined minimum payments of $2000 per month. Lets say your other bills (utilities, gas, food etc.) and savings deposits come to $700 per month. So, you have $300 per month to put towards the program. . Net Income per month: Total of Minimum Payments on Bills (mtg., loans, credit cards) Other Bills (utilities, insurance, gasoline, groceries, etc.) Savings $3,000 $2,000 $600 $100

Income Total Payments of all Bills and Savings Extra Money to add to Snowball Plan

$3,000 $2,700 $300

Debt Elimination A Practical Approach

Emergency Fund
It is very important to have at least $500, preferably $1,000 or more, in your savings account as an emergency fund. That way you arent tempted to use your credit cards for a car repair or some other emergency bill. Dont start to pay your snowball debts until you have this done. . You can use the program to pay your savings account as the first bill. So, in the scenario we just looked at, pay your minimum payments on ALL your bills and take the $300 extra each month, and put it in your savings account until you hit your goal. THEN, you start paying off your bills. If, for any reason, you have to take money out of your emergency fund, you will need to replace it as a first priority. Use the same method as you did above. Using your extra money fund, to repay your savings. Once the savings is back to the desired level, get back to your regular snowball debt program.

Debt Elimination A Practical Approach

Step Four
Focus your attention on the first item on your list, whether this is the lowest amount of debt you owe or the debt with the highest interest rate. Lets say its a Sears credit card with a balance of $550 and a minimum payment of $20. Send your regular payment of $20 plus whatever amount of extra money (in our scenario, the $300) you have to this first bill until you have paid it off. .

Step Five
Now that your first debt is paid off, take the amount you were sending to your first creditor ($320 in our scenario) and add it to the minimum payment you are paying to your second creditor on your list. Once this is paid off, you send the minimum payment amounts for the first and second debts, plus the $300 and start hacking away at the third debt. Keep doing this for each item on your list until, at last, you are debt free

Debt Elimination A Practical Approach

Snowball Programs
There are a bunch of debt reduction programs on the internet. Some of these programs can cost up to $3500!! That is absolutely ridiculous. What is the point of spending a ton of money on a program when you are already in debt!! Two programs I have used and can recommend. Powerpay (online only) ZilchWorks (downloadable to your computer) Powerpay: https://powerpay.org cost = FREE cost = $39

ZilchWorks: http://www.zilchworks.com/zilchstandard.html

Debt Elimination A Practical Approach

ZilchWorks - Example
5 Credit Cards 1 Automobile Loan Total Debt: $11,719 Extra Money Available Each Month: $100 APR Balance 21.00 $215.00 21.00 $365.00 19.80 $1,705.00 15.90 $2,341.00 12.90 $1,250.00 10.90 $5,843.00 $11,719 Payment $15.00 $23.00 $49.00 $73.00 $27.00 $315.00 $502.00

Creditor Radio Shack Sears MasterCard Visa Discover Auto Loan Totals

It will take 12 years and 5 months to pay off these debts Interest Charges: $4,917 Total Money Paid: $16,636 The Solution It will take 1 years and 11 months to pay off these debts Interest Charges: $1,599 Total Money Paid: $13,318 Money Saved: $3,318 Time Saved: 10 Yrs 6 Mos.

Debt Elimination A Practical Approach

ZilchWorks Example

Debt Elimination A Practical Approach

Financial Freedom
If you will live like no one else now, later you can live like no one else Dave Ramsey

If you make sacrifices now that most people arent willing to make, later you will be able to live the life those people wish they could live.

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2. 3. 4. 5. 6.

Make a budget and live by it

Pay cash for everything or use a debit card Use the Debt Snowball Method to pay off all your debts Live frugally (need vs. want) Prepare for emergencies Pay yourself first - invest regularly

Debt Elimination A Practical Approach

Financial Freedom
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Good Luck on your Journey to Financial Freedom!