Get Out of Debt. Live Free.

Well, I was thinking today about the fact that I spent 15 years from March 2001 to May 2016 working for Dave Ramsey, the debt free king, but I’ve never written anything about money or debt on my blog. What a shame! Now I’m working for Steve Down, who has a very similar story to Dave’s. After leaving Dave’s, I thought I was done with the personal finance world, but God had other plans. In early December 2016, all that changed. Now I find myself working to build a new personal finance company to help people say goodbye to debt and re-imagine wealth. Why “re-imagine wealth”? Let me tell you. For most Americans wealth is something they will never have and for other Americans wealth is evil. I’m here to tell you that both of those concepts of wealth are lies. It is my belief that you and everyone else can be wealthy. What is wealth? Wealth is having enough money to meet all of your needs and wants while leaving enough left over to help others. The path to wealth starts with good money habits, and one of those money habits is living without debt. Here is where my story began.

So you want to know how to get out of debt? You’ve come to the right place. Personal debt destroys your ability to build wealth. It’s just that simple. I was 25 when the lightbulb first came on for me. I was fresh out of college and enjoyed what I considered a good paycheck. I worked as an engineer for a local manufacturing company making more money than I had ever made before. I had risen through the compensation ranks of my high school minimum wage jobs to an amazing $13/hr manufacturing engineer. My rent was cheap…very cheap, and life was good. I had a nice reliable car, my green four door Saturn SL2 sedan. I had a 75Mhz Micron computer, a real powerhouse for the time. My other belongings included a 27” Sony TV, a Harman Kardon stereo system, a bed that I made out of wood from Home Depot, and a desk my father built for me. Life was good, or so I thought.

It was tax time, and for the first time in my life, I actually had enough money to be taxed. Along with millions of other hard working Americans, I received my annual W2. I cut open the envelope, pulled out the W2, and then stared in amazement. I was shocked not at the taxes I’d paid, but at the amount of money I had made. $39,000 give or take a little. $39,000…wow. That’s like 10x more than I’d ever made in my life annually. Where did it all go?

I looked around my apartment. I had a paid for TV. I had a financed computer. I had a paid for stereo with some kickin’ speakers. Suddenly, that bed I built and was so proud of didn’t look as good. In the driveway was my financed car with a $315/mo payment. That was my wake-up call. That was the day I realized debt steals your ability to build wealth, and I changing the way I felt, thought and acted about money. I had to discover how to get out of debt.

That’s the first step to getting out of debt. You have to have that wake-up moment where you realize that debt isn’t helping you. It’s hurting you. It’s hurting your ability to find financial security. It’s blocking your opportunity to become financially free. It’s destroying your ability to become wealthy, and it’s preventing you from helping others. Personal debt is not your friend and that’s why it’s important to know how to get out of debt.

Knowing how to get out of debt isn’t the hard part. The hard part about getting out of debt is the doing.

When I had my wake-up moment at 25, I set out on a mission to be a millionaire by age 40, and the first step in my plan was to get out of debt…fast. Unfortunately, there’s no silver bullet to getting out of debt. You didn’t get into debt overnight and you’re not going to get out of it overnight either. Getting out of debt requires a plan and hard work.

How to Get Out of Debt

  1. Create a Debt Checklist. Unfortunately, many people just pay their bills as they come in and don’t keep track of all their debts or where they stand on their balances. This is a disaster for your finances and not to mention a disaster for your health and life. The first step to getting out of debt is to make a list of all your debts including interest rates and payments. Make sure you include any student loans, your mortgage if you have one, and even debts you owe your grandma.
  2. Organize your debts. Create Your Debt Waterfall. Now that you have your list of debts, it’s important to organize them into a payoff schedule. At Financially Fit, we call this the Debt Waterfall. Your Debt Waterfall is the order of your debts that allows you to accelerate your payoff speed with each debt you pay off. Once you pay off your debt, you use the money you were using to pay it off and use it to accelerate the payoff of your next debt.There’s a lot of discussion on how to organize your debts to pay them off quickly, but the truth is, just stay focused and pay them off. If you get distracted or discouraged, you lose. Stay focused and you’ll eventually become debt free.
    (1) Highest Interest Rate to Lowest Interest Rate: In many cases, paying the highest interest rate off first can get you out of debt the fastest and save you the most money. However,
    it can also be one of the hardest ways to stay motivated to execute. If you don’t finish, you don’t get out of debt.
    (2) Calculate the Priority Quotient: The priority quotient is a special method developed by Financially Fit. The priority quotient uses your minimum monthly payments to help order your debts into the fastest payoff method. The debt with the lowest Priority Quotient is the debt you payoff next. The debt with the lowest number of months to pay it off is your highest priority debt. Attack it first, then move on to the debt with the next lowest number of months to pay off. To calculate your Priority Quotient use this formula:
    (Balance / Minimum Monthly Payment = How many months to pay off that debt)
    (3) Lowest Balance to Highest Balance. Ordering your debts and attacking them with the lowest to highest balance can offer you the highest satisfaction giving you little wins along your debt payoff journey. By using this method, you can help keep yourself motivated along the way until you reach the finish line. Many times by attacking the lowest balance first, you can get your first debt paid off in 2-3 months, then use the money you’ve freed up to attack the next debt.
  3. Assess your cash flow. How much excess cash do you have each month? Use it to accelerate your debt payoff plan. We call this building your Focus Fund. A Focus Fund is cash that you are using to focus on accomplishing a financial goal. In this case, you are using your Focus Fund for paying off your debts. It’s important to build your Focus Fund to a sufficient level to attack your debts and pay them off as quickly as possible. If your debt payoff drags on for too long, it’s possible for you to get discouraged and quit only to return to your old lifestyle. Keep your Focus Fund attacking your debts, and you’ll make it through.
  4. Pay Off Your Debts. Once you have your list in order and your cash flow plan, you can begin your debt waterfall. The debt waterfall is what Financially Fit calls your payoff plan. As you pay off each debt, you take the cash you’ve freed up by paying that debt off and attack the next debt. As you pay off more and more debts, you’re Focus Fund grows larger and larger until you have all of your debts paid off.
  5. Never go back into personal debt. Personal debt is a trap that will rob you of your ability to build wealth. Sadly, many people who finally become debt free return to debt believing they are more mature now and can handle it. Once you become debt free, the trick is to put your money to work for you. That’s how you can become financially free where you no longer
    work for money because your money now works for you.In most cases, your consumer debt can be paid off in two years or less. For those who are even more aggressive, you can become debt free including your mortgage in 5 years or less. yes, that’s right, 5 years or less including your mortgage! Now that you’ve learned the principles of how to get out of debt, it’s important that you tell others how to get out of debt.

I’ve personally been free of consumer debt since January 2002, and a little later we paid off our mortgage. I can honestly say the grass is greener when you’re debt free.

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