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

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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
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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
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Do you have a budget?  Perhaps you’ve tried setting a budget only to find that you are not really following it.  Having a budget is the first step towards improving your financial situation and moving towards financial freedom.  By establishing a budget, you are able to have a clear understanding of how much money you have coming in, how much you have going out, and where that money is going.  A budget allows you to follow the primary rule of a debt free life – spend less than you make.

Unfortunately most budget systems are very complex. They require you to itemize every category of spending and keep track of where every item you spend goes.  While this system make work for people with strong organizational skills or those who have the time to track every cent, most people just end up frustrated.

Traditional budget systems are also very restrictive. Having every category scheduled to the precise amount you will spend doesn’t allow for the fluctuations that naturally occur in life.  Life doesn’t always flow on an exact monthly basis.  Perhaps during one month you purchase more groceries; the next month you may need less.  One month you may not have time or desire to spend much on entertainment, but the next month your favorite band may be in concert in your area.  When this sort of situations come up you may feel handcuffed by your budget.  It is often when this happens that people will start making exceptions and eventually abandon their budget.

Another reason that many budget systems do not work is because they are not prepared for the unexpected.    Let’s face it, life brings many unexpected events our way, and they often cost money.  An emergency fund is the ideal way to protect you from most of these; however what do you do while you are working to establish your emergency fund?  Also, many unexpected expenditures are small and hardly worth breaking into an emergency fund.  It may be an unexpected $30 because your good pair of pants developed a rip in them, or an unexpected tank of gas you need because you had to pick up your son or daughter from a friend across town.  These expenses may not be planned and in fact they may occur after you’ve already spent your budget for these areas.  It is hardly worth breaking into the emergency fund, but you also don’t have any budgeted space for them.

The end result of traditional budget systems is that most people don’t follow them for long.  Because the budget is so complex, feels restrictive, and does not allow for the unexpected, it is very easy for people to get off budget.  Once someone is off budget it is often easier for them to stay off than to start over.  And so people quit.  People start with good intentions but then end up leaving their budget behind and get back into the same financial traps they were in before.

That is why people need a simple budget system.  You need a system that will be easy to use, give you some freedom in your monthly spending, and has an allowance for the unexpected.

Steps in Developing a Simple Budget

1. Start a spreadsheet – at the top, write down your forms of income.

Write down all of your family’s forms of income (net take home pay).  For example, on our budget we have my paycheck, my wife’s paycheck, and our expected business income.  If you get paid monthly you will have one column in your spreadsheet.  If you get paid twice monthly you will have two columns.

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2. Record all of your bills payments and anything you need to pay on a monthly basis.

In this step you should simply list everything that is a MUST pay each month.  These would primarily be your bills and debt payments, not variable expenses like groceries.  Call these your fixed expenditures. On this list you should include:

• mortgage or rent
• all utility bills
• phone bill and cell phone bill
• cable or satellite bill
• car payments
• student loan payments
• minimum credit card payments
• house and car insurance
• monthly giving
• any other debt payments

This list should include everything you are committed to.  If there is something on this list that you don’t want to be committed to cancel that service, or pay off that debt.  If you have two columns after step 1 because you get paid twice monthly, you should place these bills and payments in the proper column based on when they become due.  Assuming you are paid an equal during each part of the month you should try to balance out the payments.

You should also look to automate as many of these payments as possible.  Use your bank account to set up automatic bill payments so that the fixed expenses are paid without any conscious effort on your part.

3.  Total your fixed expenditures and calculate your income minus your fixed expenditures so you have your amount remaining.

After step 3, your budget should look something like this:

4.  Set a budget for your variable expenses.

Your variable expenses will be all of the other types of expenditures that you may make in a budget period (ie. a month if you are paid monthly, or ½ month if you are paid twice monthly).  This will include your groceries, clothing, gas, entertainment and any unexpected surprises that may come up.  Your goal is to estimate a reasonable amount for these variable expenses, but to keep it as low as possible.

The process of finalizing your variable expense section of the budget will take time.  You will have to play with it over the first few months of using the simple budget system.  But once it’s complete it will give you flexibility and freedom in your spending.

5. Withdraw cash each budget period equal to your variable expenses.

Studies have shown that people who spend cash instead of debit or credit cards on average spend 18-28% less.  That is true of every category of spending, even clothes and groceries.  By spending cash you have to think about making each purchase, and have the emotional response of giving up cash.
Because of this fact, you should withdraw your variable expense budget at the start of each period.  This is what you will use for every variable expense.  The important thing to remember is that once the cash is gone – it’s gone.  You need to make it last for the entire budget period.

Because the variable budget is grouped together, you have a new found sense of flexibility.  You can spend more on groceries if there is a fantastic sale.  You can spend less on entertainment if there is nothing of interest to you this month.  You can easily flex between one type of variable expense and another.  It also gives you some leeway for unexpected events.  Certainly you have to keep within your overall variable budget but you can easily flex from one area of spending to another.

6. Use the remainder to accelerate debt payments and/or to save for the future.

The money you have left by this point in your process should be used to payoff debts or save for the future.  For most people, the best first step is to pay off debts as quickly as possible.

To do this, pick one of your debts and put all of the remaining money directly on to that debt.  This is known as a debt snowball and is recommended by financial experts such as Dave Ramsey.  Some experts suggest that you start with the debt with the lowest balance (in order to create some quick success), while others argue to attack the debt with the highest interest rate (in order to save more money in the long-term).  Either option can be successful, just make sure you start paying down debts right away.

The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.

Now your completed simple budget should look something like this:

This budget system will simplify your financial life.  It sets all of your fixed payments on some form of automatic payment schedule so that you don’t worry about them.  It groups your variable expenses together to give you flexibility in how you spend them.  It can lower the stress that comes from trying to fit make every budget category equal and trying to keep track of every purchase.  By using cash you will spend less, and by following the debt snowball you will pay off your debt more quickly.

The Success Professor – Danny Gamache