Everything to Know About Your Money (Improved): Part 2 - Debt
Go Through The FIRE
This post is 1,023 words, a 5-minute read. Enjoy!
If not knowing your numbers is like driving in a storm with limited visibility; having High-Interest Debt is like driving through that storm at night, with sunglasses on, music blasting, and children screaming in your backseat.
You wouldn't be able to drive. You would be in a state of constant panic. Worried about any and every little thing. Fearing that the worst could happen at any time and you would be unable to do anything about it.
Debt Defines You
This is what it is like living with high interest or bad debt. When I say high interest, I mean anything with an interest rate over 6% or debt on consumer items. When I say bad debt, it is debt that removes money from your pocket and adds no value. Some examples:
Credit Cards: average interest rate is 20%
Buy Now Pay Later: false belief you can afford more than you can
Auto Loans: Depreciating asset
Personal Loans including for weddings, parties, mattresses, gifts etc.
These kinds of debts are crippling and demoralizing.
The best definition of debt is by Kent Nerburn, who said:
Debt defines your future when your future is defined, hope begins to die.”
When you think you are moving forward, debt pulls you back. It takes something that should be working in my favor, compound interest, and turns it into my greatest enemy. It is why I despise debt and want it out of my and your life as quickly as possible.
The worst thing about these debts is how easy it is for us to rack them up. Through various advertising and sales tactics, we easily fall for the “more is better” lie. Read my post called Don't Fall For It, on how businesses use our human nature against us. My advice is like my dad says:
Cut your coat by your cloth
The American way to say this:
Live on Less Than You Make
If you can do this, you are well on your way to winning with money. If you don't, everything else is a waste of your time. It will be like your car is stuck in a quicksand. Every time you think you are finally debt-free, you will look up and find yourself in the same position. This is why it is important for us to first deal with the true source of the problem. For that, you have to go back to the prequel of this series. Master your money psychology, so you are not setting yourself up for perpetual failures.
Now the other side of this is paying off the debt you already have. Before we talk about tactics, it is important to say this.
🔥🐦🔥Go Through THE FIRE!
There are just some things that we just have to endure and go through.
Paying off debt is one of those things.
Sure, some tactics could help on the edges. But in the end, we all have to GO THROUGH THE FIRE. Do not seek out shortcuts or pain-free ways to be debt-free, there are none. It will cost you something and you have to either be okay with it or get over it. Then come out on the other side like a Phoenix!
There are two ways you can go about this: The Snowball Method or The Avalanche Method:
The Snowball Method - in this debt pay-off method, you focus on paying your smallest debts first and paying the minimum on everything else. So if you had:
$3000 - Credit Card
$2000 - Car Loan
$20,000 - Student Loan
You would focus on the Car Loan first then move to the credit card then finish out with the Student Loans.
Benefits:
This method is great for anyone who needs quick wins for motivation as they pay off their debt
This was my preferred method to recommend but over the last year I have changed my mind
The Avalanche Method - in this payoff method, you focus on paying off your highest-interest loans first and make minimum payments on everything else. This helps ensure you do not pay too much in interest. So using the same debt amounts above:
$3000 - Credit Card
$2000 - Car Loan
$20,000 - Student Loan
Unlike the snowball, this information is not enough to decide on which one to pay off first. You need to get the interest rates as well
Credit Card - 25%
Car Loan - 8%
Student Loan - 4%
Based on this, your number 1 target is the Credit Card, then the car loan, then the student loans.
Getting rid of that Credit Card fast will make a MUCH bigger difference on your pockets because of how high that interest rate is.
Benefits:
It takes a bit more work
Typically shorter time frame to pay off debts.
You also pay less in interest over time.
But can be discouraging for some.
A few tactics that will help on the edges:
For credit card debts, using a 0% for x months card can be helpful to speed up your pay-off process. This will not be the reason you pay off the debt but it can be helpful.
For a car loan, you might have to sell the car to help pay down the rest of the debt and then buy a cheaper car.
You could also trade it in for a much cheaper car, then roll your equity into a cheaper car and that might cut down the amount owed. But it would still suck.
You can sell items that you have in your house that you do not use or use once to generate quick cash to pay off debts.
For credit cards, ask for lower interest rates.
Do not wait for someone to save you from this storm. The truth is no one is coming to our rescue. It is time for us to give OURSELVES HOPE. Real HOPE, not platitudes and vague promises.
Go Through The Fire
God Bless You
✌🏾
Recommendation Section
Last week, I shared the post below and it had some great debt rules.
Katie Gatti Tassin in Incentives are Not Instructions, breaks down ways that wealth (for lack of better words) effs up your worldview. A snippet from the post:
While nearly 90% of Americans agree that “the government should spend what’s necessary to ensure all children have good public schools,” only one-third of the richest 1% feel the same way. Fifty-nine percent of the general population say they’d be willing to pay higher taxes in order for every person to have healthcare; only 41% of the richest 1% say the same.
Morgan Housel in Minimum Levels of Stress, perfectly describes the current state of things in the US. Where things are great but yet everyone feels terrible.
Nick Maggiulli in The Things You Can't Buy, writes about all the ways we chase after money but miss out on the most important things in life. He also makes an awesome announcement.
Johnathan Clements in Advice For The Kids, gives some of the best financial advice for us youngins in bite-sized form that I've ever seen
There are hidden costs in almost everything we choose to purchase. Doug and Heather Boneparth have a series covering many of them. The latest topic is on Holidays
🎙️Two podcasts I love:
50Fires. It is by Carl Richards, a recovering Financial Planner and Advisor. He could help other people with their finances but had a difficult time talking about money with his wife and children. It has quickly become one of my most anticipated podcasts to listen to every week.
Money For Couples by Ramit Sethi. Ramit is no one new to the world of money and personal finance. In his podcast, he talks with couples about their finances and helps them better enjoy their money or better get aligned. This is very important podcast for me as I enter a new stage of life.