Week 2 – Pay Your Debts Correctly and Pay Yourself!
This second week of July kicks-off with week two and our second key to our financial independence quest. If you missed week one, read that here. Now that you’ve decided you want this, and you seriously want this, it’s time for rubber to meet the road. This week, learn how to correctly pay your debts and get started paying yourself first!
Many people out there make a classic mistake: paying their debts wrong. What I mean is that they are “hamster wheeling” – paying about the same amount every month and never making any real progress in debt reduction. Usually, people do this by slightly topping up what is paid on every debt. For example, they will round up all their minimum payments a few extra dollars or just to make the payment even across all of their accounts (i.e., $43 becomes $45, or they pay $100 on a $90 payment). This is a waste of time and money. You have two choices that will yield much better results: snowball or avalanche.
If time is most important to you, i.e., how soon you can pay off a debt, use the snowball method. This is where you pay off the smallest balances owed first. Thereby knocking out low-balance accounts over shorter time frames and you get a sense of progress.
Mathematically, the avalanche method saves you the most cash over time. Using avalanche, you pay the debt with the highest interest rate first. So, if the amount of money saved and the amount of money you actually pay back over time is most important, use the avalanche method.
For either method, stop topping up all of your minimum payments. Take the total amount of additional money over and above your minimums that you have been paying on each account and add it to either the smallest balance account (snowball), or to the highest interest rate account (avalanche), in addition to that account’s minimum payment. Be sure that you do not miss a payment or not pay the minimum due on each account. When one account is paid off, take that account’s minimum payment, the total amount of additional money from all the top up payments, and add it to the next target debt.
If you need a visual on how this works, how much you can save, or how long it will take to pay off your debts, become a client. I can show you how to structure your debts to save the most time or the most money depending upon what’s most important to you.
Finally, you need to take to heart that YOU are your most important creditor. Always pay yourself first! This can be challenging in the beginning, but you have to learn to do this and actually do it. If you are really tight on money, start with a small amount. Even if that amount is $5 per week. The key is that you pay yourself first and as your debt picture improves you will naturally increase what you pay yourself. The point is that you do it, do it regularly, and make it the first thing you do when you earn money. Pay yourself first! Always!
Not sure how to start or what to do first. Call me. As an independent Certified Financial Planner™, I can help you with a savings goal, debt reduction, setting a timeline and evaluating resources. #talktometuesday #education #Hireaplanner #savings #savemore #payyourselffirst #FiveKeysToFinancialFreedom #FinancialIndependence