How Bad Is Your Debt?
Have you been spinning your wheels trying to get out of debt? Would you like to see some light at the end of the financial freedom tunnel? Most people that are in debt up to their eye balls are only there because they never really learned how to manage their money correctly. In my early years I learned nothing about money from anyone in my life, so when it came time for me to fly on my own as a starving musician I failed in the money department with a capital F.
I realized I had financial issues many times over the years and would read and study everything I could get my hands on, but I just did not have the will power to enact my plan once I had a plan. There was always some new toy, or too good to be true getaway that I just had to have.
Getting out of debt is not hard, REALLY! The actual act of getting out of debt is just a mechanized set of actions, and the BreadCrumbs have been left for you to follow. In my forthcoming book BreadCrumbs to Financial Freedom, I lay out a very easy to follow path to eliminate debt and build wealth. If you just follow the path in the 12 steps to financial freedom, you will see fantastic results. Just start at step one, and only move on to step two once step one is done.
BreadCrumbs to Financial Freedom!
12 Steps to eliminate debt and build wealth: Here are the very easy steps to financial freedom. All these steps will be explain in great detail in my forthcoming book “BreadCrumbs To Financial Freedom”, and my on-line video on demand course of the same name. Here is a overview of the steps.
Setting Goals: Mapping out your financial future
Here we will be taking a look at how and why you are where you are today, and some of the things you could have done better. Most people live in denial (see my blog on denial, Click Here) about how bad their financial life is, and in most cases if their financial life is in shambles their personal life is also in very bad shape. There is nothing more destructive on a relationship then financial issues. Many people teach setting goals and you have to have all these long term goals and many short term goals to get to the long term goals, and with this most people lose interest and sight of their goals because the methods are way too and hard to understand. So in this section I really want to focus on why you are where you are, because if you don’t learn from the past than you are most likely going to relive the past. In knowing what you did in the past you can set goals that better help you in your financial recovery. Setting goals should not be hard, or hard to follow. So, here we will setup some goals that will help you financially, and as things ease up in your financial life I’m sure you will see things get better in other aspects of your life also.
Developing a Written Budget: Plan where each dollar is spent and stick to the budget
Like I have said many times over eliminating debt is not rocket science, it just take a plan and sticking to the plan. And for most people sticking to the plan is the hardest part.
Something else I always find is that most people that are in financial trouble have never taken the time to write down all their debt, bills and expenses and see where they really stand financially. Making step number two one of the most important steps and the biggest eye openers of all the steps. I have had more OMG moments with my family, friends, students, and clients during this step than any other step.
Almost everyone starts out in this section very shy and very stand offish because it is like peeling back the skin and exposing nerves. No one wants to see how bad it really is, or share that with another person. This can be a very painful exercise to put all your numbers in the spreadsheet and have it spit out some very scary results (Click Here to read more about pain and how to use your pain in a positive manner). I have had many people cry once all the numbers are in the spreadsheet, just remember the numbers do not lie. On the other hand once their breathing comes back to normal, many people feel much relief and liberation in seeing all their numbers in one place. This gives you a starting place to begin your financial recovery (Read about Financial Recovery by clicking here).
Get started TODAY on your financial recovery journey by downing loading my WLID Budget Calculator.
Starting a Rainy-Day-Fund: $1000 in your rainy-day-fund
If you are anything like me, up until the past three years I had a very hard time saving even a penny let along $1000 for a rainy-day fund. So in step three in the BreadCrumbs we kick the financial recovery into high gear and save up $1000 for your rainy-day fund. To many this sounds like a daunting task, but with the help of the many creative ideas you will find in my book BreadCrumbs to Financial Freedom you should have your rainy-day savings funded in no time.
Increase Income/Reduce Expenses: Extra vs Residual Income / Wants vs. Needs
In step four we talk about both increasing income and reducing expenses. When people think about fixing their financial issues most only think about reducing expenses (Blog Alert – Click Here to read Less is More). And part of the exercise in step three when creating the written budget is to create two What-If budgets. These What-If budget make it real easy to see what needs to be sold such as cars and motorcycles, really anything you own money on that is not needed to live day to day.
The part that is not as easy to see is small ways you can increase your income. Just think if you add $100 per week to your income that is $400 per month and a whopping $4800 per year. That is not chump change and could really go a long way at reducing your debt.
So, in this step we will help not only eliminate expenses, but get your creative juices flowing on way to increase your income, from starting a eBay store, to just going out and getting a pizza delivery job and everything in between. Of course I like to be creative and get people thinking about ways to make money that relate to hobbies or things they really enjoy doing. Sometimes these income projects turn into a whole new career, and just think how awesome it would be if your career was doing something you really enjoy.
Debt Reduction Ripple Effect: Pay off your debt from smallest to largest balance
This step is where the rubber hits the road. Once you have your budget on paper and a plan in place it is time to start working the plan. During this step you will continue to refine your written budget, increase income and decrease expenses. With the help of the extra income and reduced expenses we will kick your debt elimination into high gear.
I have written a video blog on how the Debt Reduction Ripple Effect (DRRE) work to pay off your debts as fast as you possibly can (Click Here to watch a video on how the DRRE works).
Expanded Rainy-Day-Fund: Build a nest egg of six months+ of expenses
CONGRATULATIONS you kicked your debts BUTT: Now that your debt is paid off it is time to take all the money you were paying on the last debt and start putting it into your rainy-day account to build a much bigger rainy-day fund.
By now you have a really good idea on how much you pay in expenses each month because you have been tracking your expenses monthly or weekly in the budget calculator for some time now. For at least as long as it taken you to pay off all your debt. Take the amount of how much you pay each month in expenses, and multiply that by six and you will know how much you will need to save up in your expanded rainy-day fund. Don’t forget you should already have $1000 in your rainy-day fund so you can subtract that from the total you need to put away in this step (Click here to check out my blog on Financial Recovery tools to read more on Betterment).
(Monthly Expenses X 6) – $1000 = Expanded Rainy-Day Fund
Pay Off Home: Pay off your home in lightning speed
Let’s play a fun game, you give me $12,000 and I will give you $3,000 of your money back. Would you like to play? You would be surprised how many people are actually playing this game.
Funny every time I talk about paying off your home as one of the BreadCrumb Steps the first thing everyone says is “That is a really bad idea, I will lose my home mortgage interest tax write off”. If you run the numbers on how much you get to write of your taxes compared to how much you pay in interest each year, I’m pretty sure you will not be so excited about your almighty tax deduction.
To qualify for the mortgage interest tax deduction, you have to itemize when you file your taxes. By itemizing, you forgo the standard deduction, which starts at $6,300 for singles and $12,600 for couples in 2015. The 2005 President’s advisory panel concluded that 54% of taxpayers who pay interest on their mortgages took advantage of the mortgage interest tax deduction. That is a whopping 46% of homeowners paying interest that receive zero benefit for all the interest they are paying. Taxpayers that do not have deductions that add up to more than the standard deduction amounts do not get to itemize their deductions.
A person paying $12,000 of mortgage interest a year and is in the 25% tax rate would only receive a $3,000 tax deduction, if they were able to itemize their deduction. As you saw above most people in the lower tax brackets do not qualify to itemize their taxes, and in turn are not able to use their interest as a deduction.
I’m not the smartest of investors but it does not seem like a smart investment to spend $12,000 to get a $3,000 tax deduction. I would rather pay off my home as fast as I could and not pay the $12,000 of interest each year, then get that $3,000 tax deduction.
Family & Insurance Planning: Life Insurance, Long Term Care, Disability
Most people never want to think about their own death, or what happens if you can’t work due to some medical reason. It is not a very good deed to make your children or family pay for your funeral and other pre-death medical cost, because you did not save anything or get an inexpensive life insurance policy.
People are also living longer but need help living in their later years. Who or how will you pay for those cost when that time comes. Also how will you survive if some unexpected event causes you to have to stop working years before your retirement date?
- 1960 – 72% of Americans owned life insurance
- 1992 – 55% of Americans owned life insurance
- 2010 – 44% of Americans owned life insurance
Family and insurance planning is a very important part of your overall financial recovery.
Retirement Planning: Take action today, for what is to come tomorrow
When in your early 20’s most people feel they are invincible, indestructible, and retirement is so far in the future they will never make it there. Most people in their 30s are usually too busy recovering from their 20s and building their careers to notice they have not planned for the future. It seems that most people do not start thinking about their future until they are in their mid 40s, then they spend the next 15 to 20 years trying to build a retirement that should have been built over 40 years.
It is never too late to start planning for the future, but if you think someone is going to take care of you when you hit retirement or some magic elf is going to give you the winning lotto numbers you are in for a big shock when you hit 65 or 70 and you are eating Alpo to survive.
Let’s get a get a plan in place so you can eat something better than Alpo in your golden years.
Kids College Funds: Save via 529 funds for children’s college
In talking to many people that are deeply in debt, most of them are contributing to their kids college funds but not able to meet their monthly obligations. Don’t get me wrong college is very important, but there is no law that says the parents have to pay for their children’s college.
One person I talked to was more than $30,000 in credit card debt, and was robbing Peter to pay Paul to pay the monthly bills. Was also consistently putting $500 a month in to his two kids collage funds, and would even take out cash advances on credit cards to make sure that money went into the kids accounts each month. I thought he was going to pull out a gun and shoot me and was very insulted at the suggestion of stopping those contributions till he was out of debt. After creating a budget and showing him where all his money was going and how easily he could be out of debt in a few years, he stopped the auto drafts.
If you are in debt, you should not be contributing to your kid’s school funds. Once you are out of debt then start pumping as much as you wish into to their accounts. And there are many great places to save for college and in this step we will explore how best to save for college.
11. Investment Strategies & Building Wealth: The Power of Compounding interest
Not much needs to be said here, once you are out of debt you can divert much of the money you were paying to your creditor into investments. Click here to read about what financial independence is.
12. Live & Give: Be free, live life fully, and retire with dignity
At this point you should be very proud of yourself, just make sure you don’t slip and go backwards. Take stock in what you have learned and keep revisiting the lessons you have learned. There is no better way to learn something than to teach it, and in part of giving back make sure you take someone under your wing that is have financial difficulty and share the lessons you have learned during your financial recovery.
There is also not better way to improve you life than giving back to the community, and others around you. So make a plan on how best you can give back, and work that plan.
How Can You Take Action Today?
Here are a few things you can do now to reduce expenses and get started in your quest for a new debt free way of life.
- Imagine yourself debt free and making wise financial choices.
- Wake up, like I did that fateful night, and stop living in denial. Acting like you don’t have a debt problem does not make it so. Check out my blog, Why Live In Debt: Denial
- STOP SHOPPING NOW!
- Fill out a monthly income and expense sheet and get a handle on what your financial picture is right now. CLICK HERE to download our excel spreadsheet that will help you see where you stand. Believe it or not, as painful as it is to see it in writing, it is also liberating to know where you stand.
- Sets some realistic financial and life goals
- Start working our time tested methods in our course Breadcrumbs to Financial Freedom.
Let me help you to help yourself become financially free, by taking our on-line, video-on-demand, step-by-step course Bread Crumbs to Financial Freedom. Don’t be scared to ask and seek out help, and imagine the possibilities of getting out of debt, building wealth, and changing the way you live, work and play.
I look forward to working with each and everyone one of you in the near future, and remember, each new day is another chance to change your life – you just have to find the right path.
P.S. Please don’t forget to browse to http://whyliveindebt.com/first100 and sign up for our newsletter, and the first 100 people to sign up for the newsletter will get $15 off our exciting new on-line video-on-demand course, Bread Crumbs to Financial Freedom: 12 Easy Steps to get out of debt and build wealth.
- 12 Steps To Financial Freedom
- Bread Crumbs
- BreadCrumbs To Financial Freedom
- Build Wealth
- Building Wealth
- Debt Equals Pain
- Debt Free
- Debt Reduction Ripple Effect
- Financial Freedom
- Financial Independence
- Financial Recovery
- Less Is More
- Love Life
- Paul Stryer
- Why Live In Debt
- Zero Cost Of Living
- Zero Drama
- Zero Responsibility
- Zero Stess
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