Proverbs 6: 4 – 5 Give not sleep to thine eyes, nor slumber to thine eyelids. Deliver thyself as a roe from the hand of the hunter, and as a bird from the hand of the fowler.
Andre Breton said, life’s greatest gift is the freedom it leaves you. To step out of it whenever you choose.
We’ve been talking about debt, and we will conclude that many series today in specifically talking about how to get out of debt. Earlier in the month, we talked about how debt was the ultimate transfer of wealth from the people to the institutions. We then talked about how the credit score is a fool’s game.
And last week, we gave you nine reasons why you might not want to have a credit card, or at least reasons why I personally Do not want to have a credit card and today I want to talk about the best way to get out of debt Here’s my supposition. My supposition is that most people desire freedom to include that of financial freedom and one of the biggest ways to get to financial freedom is to have that of debt freedom Most people are greatly welcoming to the idea of being debt free.
But the problem is most people don’t know how to get out of debt. I know I didn’t. We were deep in debt, still going deeper into debt. And I knew I wasn’t on the right path, but I didn’t know that other paths were available. I didn’t know what to do and what not to do and how to go about doing it until I found a systematic proven way to get out of debt.
And that’s what I want to teach you today. Essentially three basic steps to getting out of debt. I say basic because they’re basically simple to understand. But they’re difficult to apply, especially in a culture and a society where debt is prevalent, inviting, welcoming, enticing and it takes a lot of challenges, right?
So, this worked for me personally, these three steps. It will work for you. It’s worked for everybody that I’ve helped coach. If you do these three things, you will get out of debt. Step number one of how to get out of debt. This is going to sound simple but stop borrowing money. You must stop borrowing.
You cannot dig your way out of a hole. You must first jump out of a hole and start filling it in. That’s kind of the irony if you, I don’t want to get political here, but the irony of this whole student loan forgiveness stuff is that, you know, we should forgive the loans because they’re oppressive, because they’re, you know, hindrance and whatever it is.
And yet at the same time, we’re still loaning money from the federal government in student loans. If they’re bad, shouldn’t we stop? If they’re good, shouldn’t we keep them? Right? So that’s the irony. Well, the same is true with you. Your own personal finances. If you’re in debt and you want to get out of debt, you cannot keep borrowing money, right?
It’s that simple. So, the way to stop borrowing is to do a handful of things, right? Cut up your credit cards. Call and cancel them to future charges. Freeze your credit, right? You go to all three different, um, credit unions, Equifax, TransUnion, Experian, and put freezes on your credit so that you cannot get any credit.
If you have a zero-balance account of any sorts, cancel it if you don’t need it anymore, right? Cause if you don’t, if you’re not going to debt, then you don’t need it. It’s simple, right? You must make the commitment to stop borrowing money. And that is the biggest thing.
The biggest thing. We talked about a lot of times here about the mental, the money mindset side of things, the mental side of things, there’s a behavior element for sure, but it starts with mindset, right? All change starts with mindset, specifically identity and go back and watch some of those shows we did earlier last year where how our identity shapes our behavior, right?
So, you must reshape your identity to a, I am a person who does not borrow money. Up to this point, maybe you have been, maybe you’re a person who always borrows money. Maybe you’re a person like me who repeatedly borrowed money. You must have a mindset shift. And the way to do that first is in your mind by saying, I am going to become a person who no longer borrows money.
And when you do that, when you draw the proverbial line one expected test on that, but two, that’s where real change happens. So that’s the first step. Make the commitment to stop borrowing money. Step number two. Gets a little harder, right? So, step number one, not so difficult. It’s a decision essentially, and then followed by some actions.
Step number two is to eliminate all your nonmortgage debt by using the debt snowball. So, when we say nonmortgage debt, that’s basically anything that is not a mortgage. So, think credit cards, car loans, student loans. Home equity line of credit if they’re small you know, consumer loans, signature loans, all these types of things, loans for furniture, loans for other purchases that you’ve done, whatever it might be.
Anything that does not have the word mortgage in it goes in this category. And you would list them out by balance. List them by smallest to largest by balance, right? That is kind of how we set up the snowball. And then essentially what we do is we, you have a spreadsheet, or you can do it on piece of paper.
If you want, you write the debt, the amount that you owe and the minimum payment, and then you sort it not by minimum payment, not by the interest rate or any of that. You sort it by the balance, the smallest balance, and what you do is you pay minimum payments on everything and you kind of attack the little one.
So, you take. All the money you can, and you apply it to that smallest debt and eventually after a period, normally fast because some of those are just a couple hundred dollars. You can get rid of those pretty fast. That one’s gone. And then you move to the next one where you take the minimum payment that you were paying plus anything else you can get throughout your budget and apply it to that next loan.
And every time you pay one off, the debt snowball, the snowball gets bigger, just like snow, a ball rolling down a hill. Let’s take an example of this and show you how it works in practice.
So, to help illustrate us, here’s an example of Chris and Jess’s debt snowball. So essentially, they have five debts. They have a Coles card, a medical bill, a visa payment for Mastercard and a car loan. So, we have listed the balance smallest, largest, regardless of interest rate. So yes, in this case, the Coles card is the highest interest rate, but that’s irrelevant as the medical bill is the second one with a zero-percentage rate.
Again, that’s irrelevant. So, we want to list them smallest to largest and associate the minimum payment with each. So, here’s the minimum payments associated with those specific debts. So, after they do their budget for the month, essentially, they have 150 left available to throw extra on the debt. So, we list some smallest largest, we pay minimum payments on everything, and we attack the little guy.
So, our debt snowball payment, we take the extra money that we have from our budget, and we throw it on the first one. And so, then the balances come down. So, we can see the first month we had 250. If we would only pay our minimum payment, we’d still owe 225. But because we’re working a plan of getting out debt.
Now the balance has come down to 75 and all the other balances came down. So next month they do their budget again. They have 150 left. The balances have come down. We list some small, small, largest, we pay minimum payments on everything. And we attacked the little guy. Well, we only have a 75 balance. We pay a minimum payment of 25 and essentially 50 from our 150 snowballs.
And that balance then is gone. So, we take the remaining money from that month that we have, which is a hundred dollars, and we throw it on the next smallest bill essentially. And the balance has come down. So next month going in, we owe only a hundred dollars on our medical bill month three. We do it again, right?
So, we list them smallest largest, but now Kohl’s is gone. So, it’s cut up, it’s canceled. It’s out of here. No more Kohl’s card forever and ever. Amen. And the balances have come down. Well, this month now we have 150 left over from our budget, but we no longer have a Coles payment. So that extra 25 we can tack on.
So now we have 175 to attack debt. Well, our mental payment’s 50 on our medical bill, so we take another 50 and now the medical is gone. So, three months in, two debts are gone, two of the five. All right. So, you see how this is starting to work. And we apply the rest of the money onto the next one, our snowball payment.
And so, we paid 35 minimum plus one 25 extra snowball. And against the balances come down month for they have now they do their budget. They have 150 left from budgeting. Plus, they have the 25 from the Coles payment that they no longer have. Plus, they have 50 from the medical payment that they no longer have.
And so now their debt snowball payment is getting bigger, and we apply it to the next smallest loan, which is the visa. So essentially the 135 and that then is paid off as well. And we start throwing the rest at the MasterCard and the balances come down because we’re not going into debt. We’re not borrowing anymore.
So, every month the balances are getting smaller and smaller. Well, guess what? Now the snowball got bigger because we picked up the 35 from the visa as well. And so, we can attack the little guy. We pay a little payment on everything and put all 260 of the snowball payment on the MasterCard and the balances come down.
And then we basically do the same thing again. We pay off then the Mastercard with our debt snowball. It’s gone. We play an extra debt snowball onto the student loan, and it comes down. Right? So, six months into it, essentially, we have gone from having five debts to essentially one. And our debt snowball got bigger.
And essentially now you can see they’re making double car payments because they had the minimum payment 300 and their debt snowballs 300. So that’s 600. And within three more months, essentially that balance will be gone as well. So essentially within 10 months, all their debts will have been eliminated using the debt snowball approach.
So hopefully now you understand how the debt snowball works. And what this really takes advantage of is again, its mindset followed by behavior.
It takes advantage of the psychological advantages of getting out of debt.
So, most people would tell you is to pay the highest interest rates first. And yes, technically from a math perspective, that would reduce the amount of interest that you’re paying as you’re getting out of debt.
If we’re worried about math and interest, we probably wouldn’t have the debt to begin with because. If we’re worried about money and interest rates, we probably wouldn’t have credit cards and car loans if we’re paying all this interest to begin with. So, it’s a behavioral thing. It wasn’t a logical math equation that got you into debt and it’s not going to be a logical math equation that gets you out of debt.
You got into debt because of Mindset because of behavior choices because of the choices you make that were mainly emotional, right? So, we must use that same emotions to basically get us out of debt as well for years and years. I remember when I first heard about Dave Ramsey is where I learned it from, so it was, he was kind of ridiculed for it, but things have really changed a long way to even to the point now where it’s part of the certified financial planning curriculum.
It’s taught in the, in the courses associated with that. Even in your major financial planning tools, it’s incorporated in that. For example, right. Capital has it here as well.
Now jumping into right capital, we can see how the debt snowball will be applied in the scenario of Joe and Jane average. So just recapping. Where they are essentially you, we can see from their snapshot of their balance sheet, it looks like they have some debts here. They have some credit cards, they have some mortgages, they have some student loans and other debts.
If we go over to the profile blueprint, we can see those in a little bit more detail. We have Joe’s student loan of 14, 000. They have a joint credit card of 5, 000. They have a joint car loan of about 27, 000. They have their primary mortgage. Jane has a credit card in her name as well for 2, 500.
Looking at their current plan, what they’re on essentially, they have a 7 percent probability of making their assets essentially last. And in fact, we can see most of their plans, essentially having them run out of money right around 76 years old.
So, they’ll still have their income, social security and pensions and stuff like that, but their assets, their checking account, their 401ks, their investments essentially are depleted at that point based upon the decisions that they have made largely for the last 30 years. Okay. Inside of the more debt options, we can see where the debt snowballs applied.
So essentially right now here are their debts. It looks like there’ll be in debt for about 21 more years or so. However, this does include their mortgage. So. When we’re doing baby step two, where we’re eliminating our non-mortgage debt, we’re not going to be worried about the mortgage at this point.
And we can see now essentially their debt still pay off in 20, 41 but it’s a lot less. So, here’s the, essentially the loans that we’re in play with and we can see the car loan pays off right now in about five years. Joe student loans pays off about 13 years. The visa pays off very late in 2041.
And the platinum card pays off in about 2036. That is just paying their minimum payments, right? Which is what most people do. Well, instead of doing that, we start to apply a, we can see here inside of right capital. Again, there are two different approaches. There’s the traditional academic one of paying the highest interest first because you pay the least amount of interest, which is true.
But it’s naive in that it tries to solve a behavioral problem with math, right? So, if we were doing math, we wouldn’t have the debt to begin with. And we can see just by doing that essentially action, we get out of debt almost 10 years earlier. And we save 5, 700 of interest changing it to we use the snowball approach.
We can see that essentially. We still get off about 12 year, 10 years earlier from a debt perspective and the interest really isn’t that much. So, while it’s good in theory in terms of paying the highest interest rate, the math really doesn’t just pan out all that much, but you get the behavioral element of, as you just seen in that. presentation of them checking it off.
So essentially, we can see how the debt snowball really condenses the amount of time that we’re in and the amount of interest that we’re paying overtime. And we get on a debt essentially in this case, almost 10 years earlier.
So, what happens is if your highest interest rate is a loan, that’s maybe like 10 to 12, 000 and you’re only throwing a couple hundred dollars a month extra at it, it’s going to take a long time for that first one to get paid off and you’re going to, you’re going to lose momentum. But if your first debt is only like three, four or 500 and you throw a couple hundred dollars at it a month, it’s going to go away like the first month of the second month and you’re like, hey, I, I had, 10 debts.
Now I have nine and then you take some more, and you throw it at it. And then another one pays off. You’re like, I had 10, nine, eight, like, man, this might work. And you get momentum going for you. You get inertia working for you. You get projection working for you. And eventually you can see, Hey, I’m down to five.
Now I’m down to two. I’m on my last debt. And eventually it gets paid off because you get momentum going for you. So, step number one to get on debt is you got to make the commitment to stop borrowing money. Step number two is to use the debt snowball approach of eliminating your nonmortgage debt.
Step number three is to go crazy. Go crazy. Like you got to go nuts. You must deliver yourself. We read that scripture in Proverbs. You got to deliver yourself like your lives on fire because your financial life is on fire, right? This debt is killing you. It’s hindering your marriage, it’s hindering your health, it’s hindering your spiritual walk, it’s hindering your career path, and not to mention it’s hindering your ability to grow wealth.
Your largest wealth building tool is your income. And when it’s all going out and stinking payments, you don’t have any money to build wealth with. You must get out of debt, and you must do it fast. Like your life’s most important. And the only way to do that is to get wired up, fired up and get after it and go crazy.
How do you do that? You have a budget every month. You have a budget, and you make that budget squeezed down to the point where you’re reduced spending to the point where it’s kind of starting to cry. It’s so bad, right? You just hammer it down. Hammer down. I remember. When we first started doing this, I, we, I’d say I told Erica, but essentially, we agreed upon, she had 400 a month for groceries for a family of six.
And I said, I don’t know how you’re going to make it happen, but that’s the only amount we can get. We just squeezed it down. We didn’t eat out. We didn’t go on vacations. We didn’t buy anything. All the stuff that we bought came from thrift stores. We didn’t spend anything for years. We reduce our spending to nothing.
Did it suck? Apsa-stinking lately. Yes, it stunk. Gives me chills just thinking about it. I don’t want to be there and we’re not there anymore, you know, because we don’t have any debt. It’s gone. The sooner you pay it, the sooner it goes away and you must cut down you’re spending to throw everything out.
Not only do you cut down your spending, Raise your income, extra work, overtime, part time jobs, things like that. You’d be surprised how much extra income you can make by working extra or picking up part time job. Eric and I, when we did this, we basically worked six jobs between the two of us. I worked three jobs.
She essentially had three jobs and we were literally passing in the night. Like one of us was always at work for a period. She, I’d have the kids at home. We’d stop somewhere, meet, the kids would get out. They don’t remember it. Thankfully, they’re so small. They get in the other car with me, or mom and they don’t want to go to work.
And the other one come home. One was a single parent home and their work. I mean, we just, we just busted it for a while. And all that extra income doesn’t go to spending. I worked hard today. I’m going to get a latte. No, no, no. All that extra money goes on to the debt and it ramps it up even more.
Right. Cause we’re going crazy. Not only that you can sell some stuff. My guess is if you look around your house, you look in your garage, you look in your basement, you look in your attic, look in you. Storage unit that you’re paying for you probably have a bunch of stuff that you could turn into cash You know; you should do sell it Facebook marketplace Craigslist You know yard sales garage sales flea markets sell some stuff look around say do I want that, or do I want the money?
That that can get sell some stuff and get rid of it. All right, make it a game Right all these things we talked about credit card points and stuff last week and how they Gamify it turn this into a game. We had this big we tried all kinds of thing We had this big debt thermometer at one point where every time, you know, we paid off a thousand dollars.
We colored it in I tried those like Christmas like wreath things every time we paid off some money, we took a wreath off kind of thing and the wreath gets smaller and smaller Make it some sort of game. I remember I was so excited about bills showing up Because, like, it was like every two or three days we were getting paid from some sort of job and we were throwing money at it.
I couldn’t wait for the bills to get there because I could pay them off soon away. Instead of going to the mailbox and being like, oh, there’s another bill, I was elated that they were coming. Because the more they came, the sooner they came, the more I worked, and I got rid of it. Again, did it stink?
Absolutely. It’s stunk, but you know, we don’t have any more, any more debt. It took us about 37 months to pay it off. And we had hundreds of thousands of that. You’d be amazed how fast some of this stuff can go away if you just go crazy and bust it. And yes, does that season stink and do you miss out on some kids and times and, and family relationships and all this kind of stuff?
Yeah. But there’s a price to pay to win. And the nice thing about this is that you don’t have to continually pay the price. Once you pay at one time, you stop borrowing, you use the debt snowball, you go crazy once it’s gone. If you don’t go into debt, it’s gone and it’s not coming back.
Imagine the day when you go and you pay off that last payment and you are debt free either with this or inclusive of the mortgage that, you know, you pay off a little bit later, but imagine what it would be like to have all of your income yours where you don’t owe anybody and you don’t have to worry about collectors and you don’t have to worry about late payments.
You don’t worry about fees. You don’t worry about interest and all that stuff goes away. And now all that money that comes in, you can start saving and giving and investing and build your financial freedom.
And so now flipping back to right capital, we can see this applied, this goes capital. Crazy strategy inside of right capital for Joe and Jane average. So, let’s say they go out and they get some part time jobs, and they start making 2, 000 extra month, essentially 500 a week. And we apply that to their approach.
And we can see that their debt now goes from not 2041. Not 2031, but essentially the end of 2025. Right? So, this is the idea of going crazy and applying all that money that you’re earning straight to your debts. And essentially, they get out of debt what’s that 15 years earlier or so. And they save a ton amount of interest.
And not only that, but this also starts to play a large role in their larger plan, which is the idea of getting out of debt. And we can see that the. If we apply the 2, 400 that they’re making from an income, essentially just for two years, the rest of this year and next year, it’s not forever. It’s just temporary until the debt goes away.
And we apply all of that using the debt snowball approach. We have now increased our probability of success. The number of trials will make it of having money at the end. Essentially. 200%, right? So, it’s gone from seven to 14 to 21. That’s 200% gain. And looking at now the median trial doesn’t have them running out of money until about 80.
So, does that solve all their problems? Absolutely not. They still have some issues that they need to achieve, but. They’re essentially out of debt now and we can see in the cash flows how that really begins to make a change Are you still going it looks like it’s still going into debt mainly because of these goals here in terms of buying cars so that we Need to adjust how much cars we’re going to save for and things like that We still have a college problem that we have to address and we still have a retirement problem We have to address but now with no debt essentially they’re beginning to put themselves in a position where their larger plan will
today we talked about getting out of debt. We talked about the three basic steps, simple to understand, certainly hard to do.
Number one, stop borrowing. Number two, use the debt snowball. Number three, go crazy. And there will come a day where you will not have any more debt. Your micro action for the week. Make the commitment to stop borrowing money. I hope this helps you on your financial journey. If you have any questions or comments, you can leave them below or send an email to Mike@truewealth.show.
And until next time, I hope you have a great day.
