Debt – Put down the shovel, and claim financial freedom.
November 6, 2019
It’s no secret that many Americans struggle with the financial burden imposed by outstanding debt. Whether it be your home mortgage, student loans or credit card bills, being in debt of any kind is like being stuck at the bottom of a pit. With the constant burden of monthly bills and unexpected expenses, escape from the pit can feel like an insurmountable task, but freedom can be yours! Your debt starts and ends with you, so don’t dig yourself any deeper, put down the shovel and climb out of the pit to the financial freedom you deserve.
The four most common forms of debt in the United States are credit card debt, medical debt, student loan debt and of course home mortgages. In many cases, this debt amounts to tens – if not hundreds of thousands of dollars for millions of Americans. If you are already debt free, you may be thinking; “Why am I reading this?”
It’s because you have demonstrated leadership by example and are in position to mentor someone. Yes, you can inspire others to become debt free. On the other hand, if you are in debt, you may be thinking; “How do I tackle such a large amount of debt?” Well, one of the best places to start is with your spending habits. After all, how can you expect to conquer debt if you aren’t properly managing your money.
A well-balanced budget is the foundation for reaching financial freedom. There are countless ways to allocate a budget, but here I’ll provide a starting point that will help you create a balanced budget that works for you and, over time, can help you escape from the shackles of debt.
- Cover the Basics: It makes sense that the first things accounted for in your budget are your necessities. For most people, this amounts to food, mortgage or rent, utilities, transportation, etc. Notice I didn’t include your cellphone or Netflix. They come later in the budget but here we’re talking about what you need to survive. Look at what you spend on these in a typical month and tally it. This is the minimum you could survive on if times become tough.
- Debt Repayment and Discretionary Spending: This is the category where many of your other recurring bills fall. So, your internet, cellphone, and outstanding debts like student loans or credit card bills should be accounted for here. Generally, these are either outstanding debts that need to be paid off or bills for goods or services that provide value outside of personal leisure. A good example would be your cellphone as it provides access to the internet and many useful resources, but is not necessary to survive. As for the debt portion of these expenses, I’ll explain how to balance those payments later on, so don’t forget to come back and adjust this section of your budget accordingly.
- Leisure: This is everyone’s favorite part of the budget, but these expenses add up a lot quicker than you might think and can put a serious dent in your monthly budget. Think Netflix subscription, Amazon purchases, your Starbucks® morning coffee, eating out, or going to the movies. Most people don’t realize how much money they spend on these things so don’t be surprised if this number is bigger than you anticipated. This should always be the first place you look when trying to cut spending as everything in this category is superfluous.
Once you work out your budget and identify what your expenses will be, you can make the changes necessary to work your way out of debt. The method I am about to share with you is known as the debt snowball method, and is endorsed by Dave Ramsey. It has even been studied by Harvard Business Review. Here’s how it works.
Make a list of all your debts and order them from smallest balance to largest balance. Then, allocate and commit to the minimum payment for each. Add the total of these payments to the appropriate section of your budget and determine how much money you have remaining. If possible, make changes in your budget by cutting from leisure expenses to maximize the surplus of your budget. Now, allocate your budget surplus toward payments on the debt with the smallest balance. Once it is payed off, move on to the next smallest debt making the minimum payment plus the “surplus.” Note that because the first debt is payed off, its minimum payment is no longer in your budget and can be added to the surplus amount. As you pay off more and more of your debts, the minimum payment from each will continue to accumulate into the payments of your remaining debts, helping you pay them off even faster.
The reason this method has been so successful is because it works in harmony with human nature. Paying off your first debt is a rewarding accomplishment and a necessary step to becoming debt free. With each debt you overcome, you reduce the amount of stress you experience and the number of bills you receive, ultimately giving you continuous positive feedback and reassurance that you are inching closer and closer to being debt free. Just imagine how you will feel when the albatross of debt is no longer hanging around your neck!