Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.
The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior.You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.
The principle is to stop everything except minimum payments and focus on one thing at a time. Otherwise, nothing gets accomplished because all your effort is diluted. First accumulate $1,000 cash as an emergency fund. Then begin intensely getting rid of all debt (except the house) using my debt snowball plan. List your debts in order with the smallest payoff or balance first. Do not be concerned with interest rates or terms unless two debts have similar payoffs, then list the higher interest rate debt first. Paying the little debts off first gives you quick feedback, and you are more likely to stay with the plan.
Redo this each time you pay off a debt, so you can see how close you are getting to freedom. Keep the old papers to wallpaper the bathroom in your new debt-free house. The New Payment is found by adding all the payments on the debts listed above that item to the payment you are working on, so you have compounding payments which will get you out of debt very quickly. Payments Remaining is the number of payments remaining when you get down the snowball to that item. Cumulative Payments is the total payments needed, including the snowball, to pay off that item. In other words, this is your running total for Payments Remaining.
You attack the smallest debt first, still maintaining minimum payments on everything else. Do what is necessary to focus your attention. Keep stepping up to the next larger bill. After the credit debt is taken care of, you are ready for the next Baby Step in your Total Money Makeover.
Myth: Only the rich can be debt free.
Truth: Anyone can become debt free. True debt reduction is plain common sense and hard work.
Many hard-working people get into debt because of mistakes. I work with those people every day. I'm talking about them—those who are willing to keep working hard—when I promise that there's hope to get out of debt and have a financially peaceful future.
But then there are lazy people who look for a quick fix, such as debt consolidation or debt management. Real debt help is not quick or easy. Laziness is a character flaw. You need to be willing to work and sacrifice in order to fix the situations that you created with your own irresponsibility. If you are not willing, then you cannot be helped.
Are you willing to get another job and work a few 80-hour weeks? If you are in financial stress because of something you've done, you need to get yourself out of the mess by working. If you think that it is too hard, you will never get out of the debt that you brought upon yourself.
Laziness is a sickness, and it will get you absolutely nowhere in life. We all make mistakes, but the question is whether you are willing to take responsibility for your mistakes! You need to learn from your mistakes or you and your children will be doomed to repeat the cycle. How badly do you want to be out of debt?
We've developed a little process called the debt snowball to do one thing at a time and keep the debt reduction process simple. I have been broke. I know how scared I felt, and I know how fast I wanted to get out of debt. I know how you feel, and I have learned that what really works is unbelievably fierce, focused intensity.
Get focused about your debt reduction with The Total Money Makeover.
Can you please define “necessities” in today’s world while trying to get out of debt and live on a budget?
Whether you’re talking about the world today or 50 years ago, necessities haven’t changed. Necessities are still food, shelter, clothing, transportation and utilities. We’re talking about needs versus wants. The problem is that many people were never taught that there’s a difference between the two—a big difference.
Most people have enough food to eat and a decent place to live. Those are necessities. I’m not talking about eating out or having a big, fancy house. Those are wants. Most people also have enough clothes in the closet and a way to get around town. They may not have designer clothes or a fancy foreign sports car, but again, those are wants, not needs. Keeping the lights on and the house warm in winter and cool during the summer? Utilities are a need. But no one needs a $300 super-deluxe cable television package.
Now, there are some important wants. I want you to have life insurance to protect your family. I also want you to have a will and health insurance. I want you to have some other nice things, too, like a better car or a nicer house. There’s nothing wrong, at some point, with having a few toys or eating at a good restaurant once in a while. But again, these things are wants, not needs.
Believe it or not, very few Americans struggle with basic necessities. Sure, there are hungry people and homeless people in America. Those of us who have been financially blessed should want to help the less fortunate in ways that allow them to get back on their feet and start providing for themselves again. But most folks in this country have nothing to whine about. There’s nothing wrong with having a few wants, but you should define them correctly—and never, ever put them ahead of your needs!