Friday, January 24, 2020

Why You Need to be Debt Free

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You likely already know this since I've mentioned it in my financial related posts for years, but we are debt free besides our mortgage.  I paid off my student loans almost 10 years ago and John finished paying his about 6 years ago, with his car loan shortly thereafter.  We don't carry credit card debt.  Needless to say, I'm an advocate for being debt free because I know how much better life is without it.  I'm also a big advocate of the Dave Ramsey plan because it works the best for most people.

Dave Ramsey's Baby Steps

I'm sure you've heard of financial guru Dave Ramsey, he's everywhere.  He set up a course called Financial Peace University and wrote a book called The Total Money Makeover which outlines the seven baby steps you want to follow if you want to get rid of debt, retire comfortably, build wealth, and give generously.  If you're going to start anywhere, I recommended checking that book out from the library.  But in the meantime, these are the seven steps:

Step One. Build a $1,000 starter emergency fund.

Step Two. Pay off all non-mortgage debt using the debt snowball method.

Step Three. Save 3 to 6 months of expenses as a fully funded emergency fund.

Step Four. Invest 15% of household income into Roth IRAs and pre-tax retirement accounts.

Step Five. College fund for children.

Step Six. Pay off your mortgage early.

Step Seven. Build wealth and give.

I'll have posts on all the other steps too later this year but today's post is just about step two - getting and staying debt free as quickly as possible.

What's the Point of Being Debt Free?

Debt seems to be just the American way of life.  People finance and lease cars.  People have credit cards.  People spend 20+ years paying off student loans.  Everyone sees this as normal, and maybe it is.  But it shouldn't be.  If debt is normal, then normal sucks.  Be weird.

Debt is a shackle over you for as long as you have it.  It causes stress and it causes large chunks of your money to leave before your paycheck hits your account, and most of it is on interest!  It means you can't do most of the things you want to - travel, buy a home, adopt a lot of dogs, retire early (or at all!), give generous donations - because you're a slave to your job.  You have to pay all this money back so you have to keep working.

Your income is your biggest wealth building tool.  And if your entire income is going towards debt repayment, you cannot build wealth.  What can you invest with if there's nothing left?

What's the Snowball Method?

Dave Ramsey's 'Snowball Method' is a debt pay off strategy intended to modify your behavior.  Motivation is more important than the math in this scenario.  In the snowball method, you list all your debts from smallest to largest.  You make the minimum payments on all of them every month and then attack just the smallest one with a vengeance - throw every dollar you can at that one debt until it's gone.  Smallest one, regardless of interest rates.  That's because when you knock out the smallest you have a sense of getting fired up and being successful.  Once that debt is gone, you take all the money you were paying towards that smallest one and add it to the minimum you were paying on the next smallest in line and attack that one until it's also paid off, and so on.  By freeing up these smaller debts and minimum monthly payments, your snowball keeps rolling and picking up more money.

Math-wise, it doesn't always make sense because you might want to pay down the ones with the largest interest rates, but I encourage you not to buck the system.  After all, if you've been doing it your way for years and still have debt, maybe your way isn't the best option.  This method is intended to motivate you and get you intense, instead of paying minimum student loan payments for the rest of your life.  It is possible that you will pay a couple of hundred dollars more in interest this way, but that just helps overhaul your lifestyle and overspending to get you to the finish line faster.

Are you debt free, and did you use the snowball method to get there?  Or are you trying to get debt free this year?

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