It’s funny how the ads make it look like that shiny new car or fancy vacation creates dreams but if it takes debt to pay for them, those things are really stealing your dreams.
No matter what your financial goal, debt is an obstacle to achieving it. Debt can be an obstacle to achieving any life goal.
People like to say there is good debt and bad debt.
“Bad” debt is money owed on anything that decreases in value over time–like cars, furniture, appliances, crap bought on credit cards etc.
“Good” debt is money owed on anything that increases in value over time – a business, education or a home.
It makes sense to focus on paying off the bad debt first.
Once you have the bad debt paid off, you can work on the “good” debt. I put “good” debt in quotes because I don’t like any debt. The difference between paying interest and earning interest has a huge impact on the quality of your life.
Here is my step by step method to slay debt (forever!):
- Figure out your WHY – what are your goals, how is debt keeping you from achieving those goals?
- Make a conscious decision to stop borrowing money.
- Fund an emergency fund of $500 to $1,000.
- Why? You want to get out of the debt cycle – preparing for life’s inevitable hiccups allows you to deal with them without taking on more debt.
- What for? Your emergency fund covers true emergencies like a trip to the ER or your refrigerator breaking.
- What not for? Your emergency fund is not for snow tires (you know winter is coming right?), not for holiday shopping etc.
- Where? Keep your emergency fund in a savings account; it is best if you keep it in a different bank than your checking account. Make it difficult to get to this money!
- Rank your debts by size, smallest to largest. This is called the debt snowball. Here is a great format to use.
- Direct all available cash to your smallest debt while paying the minimum payment on your other debts. Once that one is paid off, move on to the next smallest debt.
- Are you having trouble freeing up money to slay your debt? You can make great progress by tracking your spending and budgeting or paying yourself first. Tune in next week for some tips.
- Ideas to stay motivated:
- Need some inspiration?
What tips would you suggest to help people get out of debt?