Wednesday, April 7, 2010

Money: Getting out of debt

I'm on a mission to be debt-free, as are many people nowadays.

I have been reading about HOW to go about being debt-free. This of course has many steps and you really need to be on board with the entire idea.

Step 1 is to make a VISION BOARD or DREAM BOARD
This will help you to stay motivated to keep on going. If you are tempted to buy a new outfit, or get your nails done, or buy a new car or a new house - Look at your BOARD first. Think about what you are trying to accomplish, and the goals you'll be able to achieve.

Make fake credit card statements that have your name and say 0 balance.

Pick out the car you'd like to be able to buy IN CASH. Figure out how much you need to buy it.

Maybe you'd like to take a vacation to Italy. Well get some pictures of Italy, put that on your board. FOCUS on what you want to do - BE DEBT FREE.

WHAT ARE YOUR GOALS? Write them down. If you don't know your goals in life how do you know where you're going? You need a game plan, you need a road map.

WHY do you want to be debt free?
WHY do you have those goals?

Your WHY is a BIG DEAL and it will help to keep you motivated.

Step 2
This is the scary part. You need to write down all your loans, credit card balances, get the interests rates and balances, figure out how much you take in - how much you put out each month. This might deter you. It might bring you down. You might be thinking, WOW we are really in trouble we are spending more than we are making!


This is exactly the reason WHY you are starting this process so you can get RID of this worry and you can get all that weight off your shoulders. The weight of DEBT.

Get folders, binders, filing cabinet whatever you can afford or get your hands on, whatever system works for you. Organize all your bills.

Put the phone wills with the phone bills.
The mortgage with the mortgage.
etc etc

It might take awhile to GET organized but once you are then it's easy to stay organized.

Have an area of the house where you put bills that are NOT PAID.
When they ARE PAID then FILE them away into their appropriate folder.

Getting organized is really quite uplifting and can help motivate you to keep going.

Step 4 - Make a list
of all your loans, credit cards, line of credits, mortgage, car payments, etc
It should include the name of the company, the balance, the interest rate, minimum monthly payment.
Keep this list somewhere safe and where you will not lose it.
When you pay off a loan or credit card, CROSS IT OFF the list it will feel AMAZING.

SO here is the big debate.

Do you pay the highest interest off first or the lowest interest rate?
Do you pay the higher balance or lower balance?

There are many theories about which one to choose...

Mathematically it makes sense to pay off the highest interest rate first. That way as you pay that one off you have more money available to put towards other balances.

Paying the LOWEST balance off first is very motivating though. You'll be able to cross those off your list faster.

So let's say you have:

credit card 1 $2000 balance 19% interest
credit card 2 $4500 balance 10% interest

2000 x 0.19 = 380 so you are paying about $380/year in interest
380 ./. by 12 = 32 so you pay $32/month in interest on this loan

C/C 2 You are paying $450/year and $38/month

In this case the lower balance IS the higher interest rate. So it makes perfect sense to pay that one off first.

So let's switch it around so you can see the difference.

C/C 1 $2000 balance 10% interest
C/C 2 $4500 balance 19% interest

C/C 1 you would pay $200/year in interest $17/month
C/C 2 you would pay $855/year $72/month

So by paying the highest interest off first that will give you extra money every month to THEN put towards the lower interest once the high one is paid off.


So let's say

MONTH 1 you put $300 on Credit Card #2 so then your balance is $4200
your interest goes down to about $66/month - you just found an extra $6/month

MONTH 2 you put another $300 on Credit Card #2 balance $3900
interest goes down to $62/month so you found another $4/month

MONTH 3 you put another $300 on Credit Card #2 balance $3600
interest $57/month - gave you an extra $5/month

So in just 3 months you found an extra 6 + 4 + 5 = $15/month
That's $180 a year!
If you want to be REALLY smart, open a savings account and put that extra money into the account.
Hey it's not much right now - but it's SOMETHING.

NOW let's switch it around and we'll pretend like we're paying the lower balance off first.

We'll take the SAME 2 credit cards:

$2000 10% interest $17/month interest
$4500 19% interest

MONTH 1 you pay $300 on C/C #1 So balance is then $1700
$15/month interest So you found an extra $2/month

MONTH 2 you pay $300 so balance is $1400
$12/month interest so you found extra $3/month

MONTH 3 you pay $300 balance left $1100
$10/month interest you found extra $2/month

2+3+2 = $7/month

So when you paid the highest interest off you found an extra $15/month in just 3 months.

But when you paid the lowest balance off you found only $7/month extra.

BUT you only have $1100 left on your lower balance!

Here are a few questions to ask yourself:

Do you need motivation to keep going?
Are you a self-motivated person?
Are you DETERMINED to be debt free?

then pay lower balance off first

then pay the highest interest off first

HERE'S A GREAT TIP: freeze your credit cards in a block of ice. That way if you NEED it for an emergency then you'll do the work to get it out. But if you just want it so you can buy a new t-shirt - you won't go through the work of getting it out right?

Step 5 Make a list of all your monthly bills
gas for car
property tax
car insurance
house insurance
other (things that are not necessities)

WHERE can you save money?
Do you really need to rent a movie every weekend?
turn lights off when not in use
turn your heat down when you're not home

Get quotes for car insurance and house insurance - it might be time to switch

Have a home phone? CALL around to other companies!

CALL your company and let them know you found a better deal and you'll be cancelling with them. They might be able to offer you the SAME deal so you don't need to switch at all.

Cell phone companies, tv companies, they will transfer you to the cancellation department. THAT department has access to plans and rebates that the regular customers service DO NOT.

ASK for a deal. What's the harm in asking?

Call your credit card company. Let them know you found a better interest rate and would like to switch. Or simply ask them, hey I have been paying on time for 3 years I'd like for you to lower my interest rate.

The point here is to FIND EXTRA MONEY

USE the extra money towards paying the balance on loans and credit cards.

Step 6 Make extra money
MANY people have turned to starting a home business and working that part-time in order to make extra money.
Here is the key: you need to MAKE MORE than you spend on the business
BE CAREFUL ask questions.

If the company has products that not many people use - there is no point in doing it

If the products are too expensive - no point

80% of the world make 20% of the money.
So 80% of people don't have a lot of money

MOST people cannot buy nice candles every month, or adults toys, or expensive cosmetics and skin care. Most people can't afford $160/month on juice.

So FIND something that ANYONE can do. Necessity products.

Ask about their monthly re-order rate.
HOW many customers shop EVERY single month?
This is a very important question because if it's low - there is no point doing it. You will not make residual income and you will CONSTANTLY need new customers every single month.

If the monthly re-order rate is high - that will provide residual income and growth in your business.

I hope these tips help you out! It's SPRING it's a great time to do some Spring cleaning on your finances and get out of debt!



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