Debt has become more the rule than the exception in the financial lives of most Americans. The best financial advice anyone can offer, however, is to free yourself from a seemingly endless cycle of debt accumulation and repayment. Debt can hinder other financial goals and get in the way of investing in your future.
There is no getting around the fact that it takes money to live in the world today. But it is also a fact that those who are most successful in building wealth, know how to manage their money and avoid the high cost of living in debt.
What (exactly) is Debt?
Anytime you use credit to acquire a product or service without cash to pay for the entire cost, that is debt. Even if you make timely payments on a credit card or a loan that you include into your budget, what you owe is still debt. Debt is any money you owe to anyone else.
Debt can include:
- Car loans
- Student loans
- Other loans - payday, home equity, personal
- Credit cards
- Medical expenses
- IRS and other government agencies
- Outstanding late bills, especially those accruing interest and penalties
What Debt is Not
Your everyday living expenses like rent, utility costs, taxes, insurance, professional services, childcare, gasoline, car maintenance, and food are not considered debt. Your mortgage is a form of debt, but it’s not on the debt list because it’s also an investment. That is, it is most likely continuing to appreciate in value, even as you work to pay down the balance. Once you’re out of debt, pay off your mortgage early to save interest.
Steps to Eliminate Your Debt
Get rid of debt as soon as possible. Here are the steps to pay off your debt for good:
- Know what you owe – Take a deep breath and look over all your debt to assess just what you owe. You might be surprised at the total, but don’t get discouraged.
- Cash only – Resolve to not add to your debt. Don’t buy what you cannot pay for in cash.
- Increase your cash flow – Look for additional income with a side gig and eliminate all unnecessary expenses. Cut the cable, stop smoking; do whatever you can to find extra cash.
- Budget – Put a bare-bones budget together for those regular living expenses that must be paid each month, including minimum required debt payments. Account for every single dollar you earn. You can plan treats like going out to eat or a movie, but add it to the budget. Your budget should also include any charitable giving.
- Emergency fund – Add all extra income left over from your initial budget to an emergency savings fund. These funds go toward surprise expenses such as auto repairs. $1,000 is a starter milestone but work toward a goal of setting aside 3-6 months of living expenses in case you temporarily lose your income. This fund will keep you from sinking deeper into debt.
- Pay off the debt – Once the emergency fund is there, it’s time to attack debt.
- Snowball payments: Use all your extra income to pay off the smallest balance first, then attack the next larger balance due up the ranks until your debt is gone.
- Avalanche payments: Alternative to snowball - pay off debt with the highest interest first, and continue until you have paid off the lowest-interest debt last.
Eliminating debt can enable setting other financial goals and realizing your ultimate lifestyle and dreams for the future. Myrick CPA can help you come up with a realistic budget to pay down your debt. Even while you are working on debt elimination, we can help you position yourself for wealth-building, investing, and retirement. Get in touch with us to see how we can help you attain financial freedom today.