MYM #016: 5 Steps to Be Debt Free

By: Ryan Greiser, CFP®

Read Time: 5 Minutes

In this newsletter, I'm going to teach you the essential steps to conquer your debt.

Mastering your debt is the key to unlocking a future of financial security and opportunity. It's about regaining control over your finances and making your money work for you, rather than the other way around.

Sadly, many people struggle with debt for two reasons. They lack a clear strategy or flat-out ignore their debt. Without a plan, debt can feel overwhelming, like an insurmountable mountain. I’ll show you how to gain the knowledge and tools to conquer that mountain.

Here’s the system you’ll learn:

1. Organizing your debt
2. Identifying "Bad" and "Reasonable" Debt
3. Explore Debt Repayment Strategies
4. Developing a Debt Repayment Plan
5. Monitor and Adjust

Let's get started.

1. Organizing Your Debt

In the journey to financial freedom, the first step is knowing where you stand. Organizing your debt lays the foundation for effective debt management. 

Here's how:

Step 1: List Your Debts

Begin by making a comprehensive list of all your debts. Here are some common types to consider:

• Credit card balances
• Personal loans
• Student loans
• Car loans
• Mortgage or home equity loans
• Medical bills
• Unpaid utility bills
• Outstanding tax payments
• Any other loans or lines of credit you may have
• By including all of these potential debts in your list, you'll have a clear picture of your financial obligations and can move forward with effective debt management.

Step 2: Gather Details

Dig deeper. Note important details for each debt – interest rates, minimum payments, and due dates.

Step 3: Calculate the Total

Add up the amounts from your list. This is your total debt load.

With your debts laid out clearly, you're ready to tackle the next steps in your debt pay-down strategy.

Pro Tip: Leverage Technology

Simplify the process. Use apps like Credit Karma to access your credit reports and get a complete overview of your debts.

2. Identifying "Bad" and "Reasonable" Debt

Understanding the nature of your debts is crucial for effective debt management. 

Let's break it down:

Bad Debt

• These debts usually come with high-interest rates. For example, owing money on a credit card with a 25% interest rate.
• They lack tax benefits, meaning you can't get any special tax breaks for having this type of debt.
• Bad debts are often non-productive. Think of buying things that don't grow in value, like a fancy dinner or a vacation.
• They have short payoff timeframes. You need to pay them off quickly to avoid high-interest costs.

Reasonable Debt

• These debts usually have low interest rates. Such as a mortgage on your home with a 4% interest rate (or 7.5% if you reading this in October of 2023).
• They come with tax benefits. For instance, you could pay less in taxes because you have this type of debt. Mortgages and student loans are the most common examples.
• Reasonable debts are often productive. It's like owing money on something that can grow in value or have a future payoff, such as a home or education.
• They have long payoff timeframes, giving you plenty of time to pay them off, freeing up cash flow. 

Identifying your debt as "bad" or "reasonable" sets the stage for creating a tailored debt repayment strategy.

3. Explore Debt Repayment Strategies

Now that you've identified your debt, it's time to install a game plan.

I personally like to tackle all of my bad debts before I develop a plan for my reasonable debts.

Here are two effective strategies to consider:

Avalanche Method

• The Avalanche Method focuses on high-interest debt first.
• Here's how it works: List your debts from the highest interest rate to the lowest. Pay extra on the debt with the highest interest rate while making minimum payments on the others.
• The psychological win: You'll feel a sense of accomplishment as you eliminate your most expensive debt first. This can boost your confidence and motivation to keep going.

Snowball Method

• The Snowball Method prioritizes paying off smaller debts first.
• Here's how it works: List your debts from the smallest balance to the largest. Pay extra on the smallest debt while making minimum payments on the rest.
• The psychological win: You'll experience quick wins by paying off smaller debts sooner. This can provide a sense of achievement that propels you to tackle larger debts with more confidence.

Pro Tip: Compare The Methods
If you want to see which strategy will save you the most money on interest, use this spreadsheet to help. It can calculate and visualize how much you'll save with the Avalanche or Snowball method. 

Choose the method that aligns with your financial situation and psychology. The key is to start taking action against your debt.

4. Developing a Debt Repayment Plan

You've identified your debts and chosen a repayment strategy. Now, it's time to put your plan into action.

Commit to Payments Above the Minimum

• For the Avalanche or Snowball method to work effectively, commit to making payments above the minimum.
• Paying just the minimum may keep you in debt longer, especially with high-interest debts.

Budgeting for Debt Repayment

• Budgeting is a crucial part of your debt repayment plan.
• We recommend using the 50/20/30 principle as a starting point. If you're unfamiliar with it, check out our newsletter for more details.
• In short, allocate 20% of your after-tax income to pay down your debts or invest for your future. This provides a clear structure for your finances and helps you stay on track.
• Pro Tip: Use the spreadsheet tool we provided earlier with your total debt management budget number to visualize your plan. It can help you see the progress you'll make over time.

By dedicating a portion of your income to debt repayment, following your chosen strategy, and utilizing the spreadsheet tool, you'll steadily make progress toward your financial goals.

5. Monitor and Adjust

Congratulations! You've laid out your debt repayment plan, but your journey doesn't end here. Monitoring and adjusting are key to your success.

Regularly Review Your Progress
Set aside time each month to review your finances. Check your payments against your plan. Are you consistently making payments above the minimum?

Stay Motivated
Celebrate your achievements along the way. Every debt paid off is a step closer to financial freedom. Reward yourself for hitting milestones.

Use the Spreadsheet Tool
Don't forget about the spreadsheet tool we provided with your total debt management budget. It's not just for planning – use it to track your actual progress. Compare where you are now to where you want to be.

Be Prepared to Adjust
Life happens, and unexpected expenses can arise. If needed, be ready to adjust your plan without losing sight of your ultimate goal – becoming debt-free. Remember, the path to financial freedom might have twists and turns, but with dedication and vigilance, you'll get there.

Conclusion:

You've just taken a significant step toward mastering your debt. We've covered the essential aspects of debt management:

• Organizing your debt to gain clarity on your financial obligations.
• Identifying "bad" and "reasonable" debt to make informed decisions.
• Choosing effective debt repayment strategies like the Avalanche or Snowball method.
• Developing a debt repayment plan that aligns with your budget.
• Monitoring and adjusting your plan to stay on track.

Remember, the road to financial freedom may have its challenges, but your dedication will lead you there.

Actionable Tip:

Today, take a moment to list all your debts, no matter how big or small. Use the spreadsheet tool we provided to visualize your debt management plan. It's a small step that can have a big impact on your financial future.

Whenever you're ready, there are 2 ways the we can help you:

1. The Master Your Money System: Discover the ins and outs of automating your finances with our easy-to-follow video course. Learn the same strategies we use for our millionaire clients to maximize your money.

2. Join Our Private Client Group: If you're in your 30s or 40s, earning a good income, and aiming for financial freedom, let's team up. Leave the financial headaches to us and concentrate on what truly matters – your family and your career.