Last week I shared how my wife and I will be debt free in a couple of weeks!  Earlier this week, I expanded that by saying that everyone should make getting out of debt a goal.  Not just a long term goal, but a goal they focus on now.  Today, I present five simple steps for getting out of debt.

1. Accept Where You Are Starting From

You need to start by accepting where you are at.  Too often people get into a state of denial around their debts.  They don’t see everything, or don’t admit to the seriousness of the problem.  For others, they like to imagine, or live like, their debts don’t exist.  No matter whether you are deep in debt, or just a small amount of debt, accept where you are.

Part of accepting where you are means you should not run around chasing magic solutions to your debt problem. Don’t chase fancy “debt consolidation” schemes or companies with all sorts of promises about paying only a small amount of their debt.  It also means that you don’t even contemplate bankruptcy. You need to start digging your way out on your own.  But here’s the good news:  you can do it!

2. Use a Simple Budget System

You may have heard that you need to have a budget, but most of the time budgets are too complicated or too rigid. You need a simple, but flexible budget system.  There are a lot of advantages to having a budget.  It allows you to track your spending so you know where money is actually going.  You might be very surprised when you see where you actually spend your money.  Further, having a budget allows you to plan where you will spend your money.  This plan allows you to make space for paying off your debts.  Finally, having a budget keeps you from spending more than you make.  If you spend more than you make you will only go further into debt. Using a budget to plan out month will help ensure that you don’t spend more than you make.

As you can see, having a budget can be very beneficial.  Of course, this is only true if you use it.  Unfortunately, most people that try budgeting don’t stick to it.  That is where the Simple Budget System comes in.  You can read about the Simple Budget System here.

3. Cut Your Costs

Once you have established your budget, and have an understanding about where you spend money, look for ways that you can cut your costs.  What are some things that you can give up? Certainly, this will mean sacrifice.  The deeper in debt you are, the deeper the sacrifices you will need to make.  Look through your expenses and determine what you can cut.  For some, it is their daily Starbucks coffee.  For others, it means cutting cable TV.  My wife and I went without cell phones for the last four years.  What can you cut?

Another way to cut your costs is to start using cash for your expenditures.  If you use cash instead of debit or credit cards you will spend less. It’s been said that people with cash spend 18% less than if they used a debit card, and 28% less than if they use a credit card.  Why?  Two reasons:  One, there is an emotional attachment to cash.  You actually have to hand it over, and there is an emotion to that.  It’s not as easy as handing over a piece of plastic.  Secondly, you always know you what you have left.  If you have $200 in your wallet and you are about to spend $50, you are very aware that this is 25% of what you have.  You are going to have a lot less.  It forces you to ask, “Do I really want to spend this?”   If you switch to using cash, you will spend less.

4. Increase Your Income

This step is one that people often overlook, but it can be extremely valuable.  If you increase your income, you can take 100% of the increase and apply it to your debts. That’s what my wife and I did.  Over the past few years we have made over $10,000 a year extra with our side business. We then applied that money to our debts!  Those extra payments dramatically propelled us towards being debt free.

There are many ways you can increase your income. You can work hard at your job and try to get a promotion.  This may work, but it is not guaranteed and it may take a lot of time.  For many, the better choice is to start a part-time business.  This might be a traditional business, such as doing book keeping or babysitting , or it might be an online business or other home business.  My wife and I have partnered with a direct marketing company.  It’s not multi-level marketing, or direct sales.  Instead it allows us to earn an income without having to stock products or sell things to others.  (Enough about that here, if you want to learn more, visit my site.)

5. Snowball Your Debts

The final step is to snowball your debts.  This means that you focus on one debt at a time, and when it is done you take that payment and snowball it into the next debt payment.  This is a technique recommended by several financial experts including Dave Ramsey.  There are a couple of ways you can do this.  One option is to start with the highest interest debt and pay it off first.  I prefer a second way, which is to pay off the smallest debt first because it helps create momentum.

When you are doing your debt snowball you make your minimum payments only on all of your debts except your focal debt. On your focal debt you make as large of an extra payment as your budget allows.  You do this until that debt is completely paid off.  Then you take the extra payment you were making, as well as the former minimum payment on the debt you paid off and start on the next debt. This way the extra amount you are paying on your debts each month snowballs as more and more of your debts are paid off.

There you have it: five simple steps for getting out of debt. You can do it.  Being debt free is within your grasp.  Just get started today!

Written by:

Danny Gamache

If you liked this article, leave a comment below, or subscribe by RSS!
I’m looking for partners, if you are looking for a way to earn extra money, click here!

In an article last week I mentioned that everyone should set the goal of becoming debt free. This might seem strange to some, especially if you have read any recent books about how to get rich. Today many of these books teach the benefits of buying real estate with “other people’s money” and how you should leverage yourself by investing as little as you can and borrowing the rest.  Unfortunately this advice is only setting people up for disaster.  If the last three years have taught us nothing else, it should have shown us the folly of this sort of thinking.  The alternative is to become debt free!

So why get out of debt?

Peace of Mind

If you really want to experience peace of mind and freedom from financial worry, get out of debt.  Few things add more stress than debt. Being debt free means you don’t have to worry about the value of your home.

Don’t Pay Interest

Imagine interest is a big sucking machine that just sucks your money away into a black hole.  As much as renting is considered throwing away money, so is the interest you are paying on your mortgage or other debt.  If you finance a car, you’ll end up paying significantly more for that car.  If you pay for that new television on your credit card and pay it off monthly, you’ll be paying far more for the TV than you would have ever been willing to pay.  Interest is wasting your money.

Significantly Increased Cash Flow

Because you no longer have the money flowing to your debt payments you will have significantly more cash flow. This is something that is easy to imagine.  Take your current financial situation.  Consider your monthly cash flow – what you earn less what you pay out.  Now imagine that you did not have any debt payments.  Take your car payments, credit card payments, student loan payments, and even your mortgage away.  You no longer have to make those payments.  Think of how much you will have left over!  This is the increase to your cash flow.

True Financial Freedom

There is a saying in ancient Scriptures that says, “The borrower is slave to the lender” (Proverbs 22:7).  You never truly have financial freedom until you are debt free.  When you don’t own anyone anything, you can have the benefits of this freedom.  Think of how many people today who are “upside down” in their home.  In other words they owe more than the value of their home.  These people cannot afford to move and sell their home.  If they sell the won’t get enough money to pay off the mortgage, let alone have a down payment for a new home.  Instead they are locked into their current home and location.

As you can see there are many benefits in being debt free.  Being debt free should be one of your goals.  Not just a dream that you hope to do “someday”, but a goal that you set out and start pursuing today!  For a long time I held the idea of being debt free as a dream; something that would be nice, but not something that I was focused on.  I did not have a plan and strategy for achieving it.  It is only a goal if you do a few things:

1.    Write it down
2.    Share it with someone else
3.    Make a plan (strategy) for achieving it.

Later this week, I’ll write about the vital elements of a get out of debt plan.

Written by:

Danny Gamache
If you liked this article, leave a comment below, or subscribe by RSS!
I’m looking for partners, if you are looking for a way to earn extra money, click here!

Follow me on Twitter (@successprof)

As I mentioned in the last article, there were many reasons why I went so long without posting to this blog. Many of them would be just simply excuses and I won’t share those with you. The fact is that I could have kept up with my normal blogging routine if I had been more persistent and focused. I didn’t. What I do want to share with you are some of the exciting life events that have happened in the last four months. In many ways, the last four months has seen the accomplishment of a number of significant goals in my life.

OLYMPICS

Back in the late 1990s I set a goal of going to every Olympic Games starting in 2002. I took the goal, wrote it down, and worked toward achieving it. The Olympics in 2002 were in Salt Lake City. The fact that it was only a long day driving from where I lived (western Canada) made me believe that I would achieve it. I took photos of Salt Lake City and the Olympic logos and put it up on my goals poster board. I focused on achieving that goal.

And I made it. I went to the Olympics in Salt Lake City and had a great experience. As I mentioned, my goal was to go to every Olympics, so I continued on and went to Athens (2004), Torino (2006), and Beijing (2008). While my goals have changed and I no longer feel I need to go to EVERY Olympics, the 2010 Olympics in Vancouver were extra important. I really wanted to experience the Olympics in my home country.

As a professor, the Winter Olympics are a little harder to make work. It is in the middle of the semester. In order to go I needed permission from my Dean, and I needed to arrange for guest speakers to teach the class. Thankfully all of that worked out and I was able to be at the Olympics for 8 days in February. One unique thing this year is that I stayed in Whistler, the mountain host venue for the Olympics. That meant a different atmosphere than I was used to, but also a few different events. Tickets were a little harder to come by than in past Olympics, however I was able to attend Cross Country Skiing and the two days of competition for Skeleton. It was great to be at a home Olympics, and especially to witness a gold medal for Canada on home soil!

PHD

Another goal of mine has been to get my PhD. You may recall that last summer I focused in on writing the GMAT. The GMAT is the entrance exam required for graduate studies in most business schools. I scored very well on my GMAT, and spent the fall applying to different schools. In the end I was accepted and offered funding at three top schools. The month of March involved trips to visit each of the schools as I worked through my decision making process.  It was challenging as I was choosing between good options and looking to make a choice for where we would live for the next four to five years.

In the end I choose Michigan State University. I am very excited about this opportunity. I will begin studies in September, but we will be moving at the end of June. (If you live in Michigan let me know, I look forward to connecting with more readers!)  Over the last two months we have sold our house in Canada, and purchased a house in Michigan. Thankfully this is allowing us to achieve another goal.

DEBT FREE

As a result of this move we are going to be completely debt free. Over the past few years we had aggressively paid off our debts and for some time now have been down to only owing our mortgage. We had even been paying off large chunks of our mortgage. (Read about how we paid of 15% extra on our mortgage here.)  On top of this, we are selling our home in a great housing market and moving to a market where prices are low. Because of these two reasons we are purchasing our new home with cash. It is going to be a great relief to be a student and have no housing payments aside from property tax and insurance.

So there you have an update on my life. Three big goals; three exciting accomplishments. We feel very blessed and are excited as we move to this next phase of life.

What are your goals? Remember, everything starts with a goal. Determine what you want and go for it.

My recommendation: Set the goal of getting debt free. This is a goal for everyone. Not everyone wants to go to the Olympics. Even fewer people want to do their PhD. But everyone can and should work towards being debt free – more on this next article!

Written by:

Danny Gamache

If you liked this article, leave a comment below, or subscribe by RSS!
I’m looking for partners, if you are looking for a way to earn extra money, click here!

One of the achievements from last year that my wife and I are most proud of was the fact that we paid off an extra 15% of our total mortgage amount. We are about to make another extra payment as we continue towards our goal of being completely debt free.

This is certainly something you can achieve as well. Here are seven ways to pay off your mortgage more quickly.

1. Make a bigger down payment

Naturally, the larger your down payment the quicker you can pay off your home and the less interest you will pay. Take for example a $200,000 home with a mortgage at 5% interest over a 25 year period. There is a significant difference between making a 10% down payment and a 20% down payment. The 10% down payment results in $135,000 in interest. The 20% down payment will result in $120,000 in interest charges. That is a total of $15,000 extra you save pay making the larger down payment.

2. Get a shorter amortization period

The shorter the amortization period, the less you will pay in interest, and naturally the shorter amount of time you will have to pay off the debt. Take the example above, of the 25 year mortgage with a 10% deposit. As mentioned you would pay a total of $135,000 in interest. If instead, you reduced it to a 20 year mortgage you would only pay $105,000. If you went even further and had only a 15 year mortgage the interest charges would go all the way down to $76,000. That means nearly $60,000 is saved by having a 15 year mortgage instead of a 25 year mortgage. Certainly that means your monthly payments are higher – but not by as much as you might suspect. The difference is only about $400 each month.

3. Pay every two weeks

By breaking up your payments and making a payment every two weeks you will in effect be making two extra payments each year. In order to do this you need to make the payments half of what you would have paid monthly. This means that your extra two payments go directly onto the principle lowering your total interest and speeding up your repayment process.

4. Increase the size of your payments

One of the most important ways of paying off your mortgage is by arranging to pay more than the minimum payment. Anything you pay extra will go instantly to the principle. For example, with the mortgage described above (a 25 year mortgage at 5% for a $200,000 home with 10% down) if you simply paid an extra $100 per month you would pay off your mortgage three and a half years early and save over $20,000 in interest. If you increased the extra payment to $250 per month you would pay off your mortgage more than seven years sooner and save nearly $50,000 in interest. If you went full out and paid an extra $500 per month you would pay off your mortgage eleven years sooner (in nearly half the original time), and save nearly $75,000 in interest.

5. Don’t refinance too often

The idea of refinancing for lower interest rates, or to free up some cash for other purposes, can be a serious temptation. Unfortunately, many people get in the trap of frequent refinances and end up getting stuck in a cycle of increasing mortgage debt. It is easy to think of using increased equity in your home to do renovations or repairs. In reality these sorts of things just add to your debt without creating any real personal wealth. Refinancing for lower interest rates may seem simple enough but there are often many fees involved. If interest rates have fallen significantly it might be worth refinancing once in a while, but don’t get in the habit. If you do refinance, make sure you understand all of the fees and make sure you are going to be living in the house long enough to truly take advantage of the lower interest rate.

6. Pay extra bulk payments

Extra bulk payments can be another powerful way of reducing the time remaining on your mortgage. In our example of a $200,000 home, an extra payment of $10,000 at the end of the first year shortens the length of the mortgage by about 2 ½ years and save you over $20,000 in interest.

7. Know your policy

The important thing to do when planning to pay off your mortgage quickly is to know your mortgage policy. Your policy may have certain provisions as to how you can pay off your mortgage and what sort of payments will have a penalty attached. In our case, our mortgage allows a maximum of 15% of the mortgage to be paid in a bulk amount each year. On top of that I can double any payment that I chose, and increase my payment amount by 10% once a year. These numbers serve as goals. By knowing that I can pay a maximum of 15% of the mortgage extra each year, I have a goal to pursue. I use their standards to drive me towards success and knowing the policy well protects me from paying any extra fees.

8. Set your debt free date

Like any goal, getting out of debt requires you to have a deadline. In paying off your mortgage your deadline is the date you set as your debt free date. This is the point in time when you plan on having your mortgage burning party and being able to say that you own your house outright. Do you have a debt free date? Take some time to set one and do what you need to do to make it happen.

Now don’t forget that you can combine all of these steps. Let’s look at one final example. We’ll stick to our $200,000 home and an interest rate of 5%. Remember that the original plan has you spending $135,000 in interest and paying off your home in 25 years. To start our plan you will make a bigger down payment. You’ll make a 25% down payment instead of 10%. You’ll take a 20 year amortization instead of 25 and you will increase the size of your payments by $200 a month. With this plan you will pay off our mortgage in 15 years and spend only $63,000 in interest; a savings of over $70,000. Do you think you might be able to put that $70,000 to good use? Of course you could. Not only that, but after 15 years you are done. You can take your monthly payments and redirect them to other things such as your retirement, travel etc. It is worth it. Make the small sacrifices now to live an unbelievable future.

Written by:
The Success Professor – Danny Gamache
If you liked this article, leave a comment below, or subscribe by RSS!
I’m looking for partners, if you are looking for a way to earn extra money, click here!