PPP032: Discover a Path to Debt Freedom

Debt sucks! The payments can cripple your ability to buy a home, travel, or even pay for the basics like rent and groceries. If you want to dig out of that giant pile of debt, start with this list of major to-dos, including creating a debt snowball payoff plan.

PPP032-Discover-a-Path-to-Debt-Freedom

Resources Mentioned

My Debt, How I’m Paying It, and the Snowball Effect

Unbury.us

Transcription

Eric Rosenberg: Ladies and gentlemen, boys and girls, children of all ages, welcome back to the Personal Profitability Podcast. As always I am your host, Eric Rosenberg. Welcome back to episode number 32. And as always the show notes can be found at the name of the episode. So you go to personalprofitability.com/episode32. It’ll be how you find this one or any other episode – just /the word episode spelled out and then the two numbers or three numbers once we hit a hundred, which we’re a little ways off from.

So first I want to say sorry for missing our last scheduled episode. I’ve never missed a scheduled episode before going on the first and third Thursdays of every month. But this last month has been absolutely crazy. As I have shared in a previous episode, I quit my job, I moved. I’m actually recording this in my new living room here in Ventura, California. You can call this Personal Profitability HQ and Studios, all-in-one. One thing from moving, for me, less expensive state to a more expensive state, is I live in a smaller place. So the living room is my office. I actually got a cool working space, too, which is pretty cool. We’ll talk about that in a future episode.

Today I wanted to talk about something that I came across. I emailed the entire email list. If you’re not on the email list definitely get on there. Go to personalprofitability.com. It’s right on the front and center of the homepage, very easy to sign up or personalprofitability.com/email. You get straight to a signup form.

I sent out an email to the list and gave away a whole bunch of books. Right before I moved I had a stack of personal finance books that weighed about 20lbs. and decided I’m gonna give it to two lucky winners and only people on the email list are eligible to sign up for that. So they signed up and the only thing they had to do to enter was answer a couple of quick questions on a survey.

And the number one problem that everybody who is on the email list has is how can they get out of debt. And I think that’s a really, really common problem these days. I’ve talked to a lot of friends and other finance bloggers about their debt situations and it seems that everyone is with the same struggles. Student loan debt is going out of control. There’s I think 1.3 trillion, with a T, dollars in outstanding student loans right now. The average graduate is getting out of undergrad with $35,000 in student loans.

I was lucky to, I worked really hard and got a full ride scholarship to undergrad thanks to the Boy Scouts of America. So shout out to the Denver Area Council and the John Madden Scholarship Fund there. So I got out of undergrad debt free but then when I went to my $90,000 MBA program, I did not get out of that debt free. I had about $40,000 in students loans when I finished. I busted my butt in my whole life so I’ve never had any credit card debt. I’ve never to this day, ever paid a cent in credit card interest but I have had a couple of mortgages, I had a car loan once and plus this $40,000 in student loans.

I paid off my car loan in less than half the time that it was scheduled. It was a five year loan. I paid it off in a little over two years. And my student loans, those $40,000. I actually started making payments while I was still in school. I worked full time while going to school full time. So when I graduated I didn’t have all these debt that I hadn’t started paying and part of my loans were subsidized so those didn’t grow during school. The unsubsidized portion was accruing interest. I knew I didn’t want the loan balances to grow even further. I wanted to make at least the interest payments and with my job income I was able to do a little bit more than that.

By the time I finished paying off my loans I’ve been on this laser-focused journey to get rid of that debt. I paid it off –  it was 2 years and 6 days. I think 366 days, I’m doing the math right in my head. Someone’s probably gonna email me and say I did that wrong. But it was 2 years and 6 days after graduation. I was totally debt free. That was the day I made my very last payment. That was quite a hurdle to pay off that much debt that quickly but it’s doable. I wanted to share…so many people are having these debt problems. That was the number one problem with your peers, the people who listen to this podcast and read the emails and read the blogs.

So I wanted to dedicated today to talking about little bit about how I got out of debt but a lot more about how you can get out of debt and start your plan to get out of debt.
Let’s just dive in right now.

Never Miss a Scheduled Payment

The number one thing when you have debt is number one, always make the minimum payments. Absolutely. Never miss a minimum scheduled payment for any of your loans during this whole process. So the best way that I know of to do this which is something I’d recommend for all of you: set it up on auto pay so you never forget. And set it to auto pay on your payday rather than the first day of the month or the 15th of the month, or whatever arbitrary day the bank picks. You don’t have to make your payments the day they ask. You can always make them early. You can’t make them late cause that’ll hurt your credit and that’ll cost you money. You can adjust your payment date a little bit. You can always move it up. You can get ahead just a little bit for one month. You can move that payment date up. That’s what I did to start. So if you can set up auto pay for all of those accounts to do the minimum payment on payday, whatever your payday schedule is, to that.

There’s lots of different ways to do it. And some let you send a direct deposit type payment from your bank’s auto pay. That’s the way I set it up when I did it. So I didn’t go into my loan website and say, okay charge me on whatever Friday, the first and third Friday of the month or second and fourth last Friday. Whatever your pay schedule is. I didn’t set it up that way. I set it up to match my pay schedule from my bank’s bill pay, which was Charles Schwab Bank. I went in there and said every other week on Friday, send half the amount of my minimum payment. That is totally allowed. It actually help save you a little bit on interest. The way loan payments are attributed or sent in, those doesn’t actually work for mortgages, but pretty every other type of debt. They will first send part of your payment to the interest. Whatever is leftover will go to the principal.

And the way interest compounds daily on most loans if you pay every other week rather than every week it’s gonna save you a little bit of money. Not too much over the long run but it does add up to quite a bit. It also helps match your expense schedule to your income schedule. Because you don’t get paid once a month you get paid usually every week or every other week or twice a month, however it’s set up, 24 or 26 paydays depending on your schedule. Match it to that because you can. They’ll let you do that and that’s totally cool. And that helped me get ahead of my debt.

So now that you got the minimum payments all scheduled away you don’t have to think about those. And if you’re having trouble, which is getting the minimum, keep listening I have something to talk about for that in a few minutes.

Debt Snowball Plan

The next thing you want to do is create a debt snowball plan. The debt snowball was made famous by finance guru Dave Ramsey. Love him or hate him, but he’s the one who made this famous. I don’t know if he was the one who invented it. But how the debt snowball works  or the debt avalanche, those are kind of two different ways people talk about it.

The way I liked to do it because it makes the mathematical the most sense is he calls it the debt avalanche. What you do is make a spreadsheet. You go to Google Docs, make a new spreadsheet. It’s free. If you have Microsoft Excel you can use that or if you have a Mac you can use whatever the built-in spreadsheet program is. I have a Mac, I’ve never actually use it. I think it’s called Sheets or something like that. You can create a new spreadsheet or there is a website that will be linked to in the show notes that you can do all these for you without having to use a spreadsheet.

You want to make a list of every single debt account you have. So list out your student loans, mortgages, car loans, credit cards, lines of credit; anything that you owed money that’s debt that you wanna get rid of. List it out. And set up columns for each one. So you wanna create one column that says the total balance that you have to pay off on those accounts, one that shows the interest rate on each of these accounts, one that shows the minimum payment. You can name it something that you’ll remember. Those are the 3 most important things you want to look at.

So what you wanna do once they’re all in is use the sort function in the spreadsheet to sort interest rate from highest to lowest. That is the order that financially it is best for you to pay off the debts.
The debt snowball as opposed to debt avalanche would be ordering it from lowest balance to highest balance because there’s a psychological factor in paying off debt. If you get one loan paid off it feels really, really good so you get revved up and energized for the next one.

But financially and mathematically it actually makes more sense to pay off the highest interest rate first because you don’t, your payments and your expense and your debt is based on the total balance but it’s really based on that cost per dollar. So if you have that one loan that has a 7% interest rate and one that has a 14% interest rate and the one with the 7% you’re paying half the expense as the 14%, so you want to pay off that 14% off first. Even if it has a lower balance, a higher balance, it doesn’t matter. All you really have to focus on is the interest rate if you wanna do it mathematically the best. So that’s the way I always suggest people do it. So sort interest rate highest to lowest.

We’ve already set up on auto pay to make the minimum payment on each of those every month. So now what were gonna do is you’re gonna work your butt off and save as much as you can. And every extra dollar that you can put into debt every month, you’re gonna put into that highest interest rate debt. You’re gonna hammer on it and hammer on it and hammer on it and make extra payments and put your tax refund money, money that you don’t normally have that’s not from your paycheck. Any extra income: birthday presents, tax refunds, bonuses at work, side income (we’ll talk a little more about that in a minute).

Needs Versus Wants

Any extra dollar that you have that isn’t committed to a need; remember separate wants and needs. Some people think they need to have a fancy car and the fanciest new phone and a cable package with 795 channels. I don’t need any cable at all. No one ‘needs’ cable, you ‘want’ cable, you want to watch sports, you want to go buy XBox games and things like that. You don’t need it.

So really think about what you need versus what you want. And anything you want – really, do budget a little bit of money for fun an entertainment ’cause life would suck if you don’t do that. But keep it slim and reasonable if you’re paying off debt. If you’re underwater and struggling to make your payments cut that out completely until you’re back above water.

So focus on your needs. And once those are all met and things like rent or mortgage, all these debt minimum payments, groceries..and that’s all you really need. Car insurance if you’re driving. The basics – that’s all you need. Clothing…I’m trying to think of other needs. You get the point. Economic needs versus wants.

So once you’ve met all of your needs every other dollar should be going to that highest interest debt. You can just knock it out as quick as you can. Once that’s gone, that minimum payment you don’t have to make every month and that extra money everything just roll down on the next one on the list. And just keep hammering away and hammering away until that one’s gone. And then roll down to the next one on the list. And eventually you’ll find yourself totally debt free and that’s how I did it. I had four students loans and the car loan all at the same time. It was the total of my four different student loans that was $40,000 and the car loan. I was just hammering away and hammering away until one day I wouldn’t have to make payments anymore. And that was awesome.

And there’s two big methods that I used to get out of that debt. And I want to share those two with you so you could use these methods to get out of debt, too. Because it’s easy to just have me say, ‘oh you know, just live without cable and then you could pay off all your debt.’ I get it. It’s not that easy. It was not that easy for me either. Though cutting cable did save me about $70 a month. That’s $840 a year. So that is serious money so don’t discount suggestions like that. But it was a little more complicated than that.

Learn to Live a Frugal Life

Number one, live frugally, kind of like a college kid. When I was in college I survived on about $15,000 a year. And that was my rent which I had roommates so I didn’t live in a nice multi-bedroom place that I live in now couple of blocks from the beach. When I was paying off my debt I lived in an okay area. It wasn’t a dangerous area .It wasn’t the nicest part of town. My rent was $600 and something a month. And I moved in and got my own apartment. Before that I was actually living in a place with roommates so it’s $400 a month. I know in cities like San Francisco and New York that’s not possible. But that was in Denver, Colorado which is one of the hottest real estate markets in the country. If I could do it there, you can do it in most places other than the Coast or the biggest cities like Chicago or Miami. A lot of the country you can find a pretty cheap place. Even if you don’t like it, maybe get a roommate. You can have your own room. You don’t have to share a bedroom.

But you do things that college kids do to save money. Eat cheaper. Don’t go out for sushi, once or twice or three times a week. Don’t do the Sex and The City lifestyle where you go into happy hour and having $12 cocktails and a couple of them multiple times a week. Really think about the budget. Yeah, maybe budget to go out one weekend a month and bring some cheap beer, have some friends over and make it a BYOB party or go friend’s houses. Find free things to do like going to parks.and going on walks and bike rides. There’s a lot of great free entertainment that you can do most of the year depending on where you live. In crappy winter months, go to friends’ houses and have friends over to your house. There’s a lot of ways enjoy yourself without spending a lot of money. Think of how much money you paid in college if you played beer pong in college and have your friends over for fifteen, twenty bucks for a whole big case  of beer. That’s as much as two beers, three or four beers at a bar depending on where you live.

Think of ways to live a less expensive lifestyle just like in college. And that’s a way to save a lot of money. Rent, those big recurring expenses, those are the big wins you really want to tackle first. And then you want to get down to the nitty gritties like the $12 cocktails. Getting rid of those things like that. But focus on the big wins first. Things like rent and roommates and the rest will follow after that. So that’s number one that I did to save a bunch of money.

Earn More Money on the Side

Number two, I started earning more money on the side. It was actually starting to earn more money on the side to pay off my loans faster that led me through the path that I am now working online full time for myself which still blows my mind. I’m on week 3 now and when you listen to this assuming you listen to it when it comes out I will be sitting in London, England celebrating that I could work anywhere in the world. And that would never have happened if I hadn’t started earning money on the side to pay off my student loans. Once I paid them off I kept earning that money on the side and kept growing it and growing it and growing it. Last week, my second week of really full time earning on the side, I figured out on Thursday night that in 3 days working that week I had made more than a whole week of my last job I had in Denver a couple of years ago. So three days of work was making more than five days of my old job. I’m still kind of mind blown by that.

If I can make that much in 3 days then I’m sure you can make something after work on an evening or weekend. That also gives you an activity to do. You don’t have to worry about being entertained or going out and spending money at bars and happy hours. Netflix is… I know you’re just thinking I’m kind of going off the seat, flying off the seat of my pants here, I guess that’s the expression. Netflix, seven, eight bucks a month, I couldn’t live without internet. I don’t think most people could these days. Netflix. eight bucks a month; that’s cheaper than going to one movie. And you get all the movies you want like 20,000 of them listed on Netflix. So there’s lots of ways to stay entertained without going out and spending money.

Back to the topic of earning more on the side. So I was busy on evenings, I was busy weekends, I was using all my free time. I started freelance writing articles for clients and they originally were smaller time bloggers who didn’t have the big budgets that my clients now do. But every one has to start somewhere. If you can make that first dollar on the side that is really the big challenge point where people get stuck. ‘How can I make $5,000 a month on the internet?’, things like that. Don’t worry about that. Don’t worry about what people like Pat Flynn and Michael Hyatt and me are doing. It’s weird to compare myself to them. They make way more than me. But these internet people who go on and say how much money they make online, you don’t have to be like them.

Start with that first dollar. You can make $10 a month on the side. That’s a hundred and twenty dollars a year you can use to pay off your debts. Double that, $20 a month which I’m pretty sure, minimum wage now in a lot of places is $15 an hour. So just mowing a lawn, you’ll make more than that. If you can mow one lawn a week that could be $500 a year towards your loans. You can see how that grows from there. You can make $10 a day, five days a week on the side. That’s $50 a week. Let’s call that $200 a month. That’s $2,000 a year in just ten months. I’m kind of doing math in my head but it’s twenty four, twenty eight hundred dollars a year depending on how much you can make if you can make ten, twenty dollars a day on the side.

Really think…think small and start with services like being a Virtual Assistant or do you have a skill, if you’re a good writer or a musician, look in sites like fiverr.com, f-i-v-e-r-r. That’s a great marketplace to start making the side. Odesk, that was the place that I had started which is now…there’s a new name, but if you type Odesk it’ll take you to the new place. It’s called Upwork now. Upwork, u-p-w-o-r-k dot com. That’s a great place to find people to work with. That’s where I found my VA who is editing this episode and transcribing this episode.

So there are people out there hiring people who have your skill set. Whatever your skill set is. If you’re good at math you could do bookkeeping, accounting. Whatever you’re good at there’s something out there. So you definitely…before I started, Fiverr or Upwork. And just look and see what other people are doing in those gigs and try it out. If you can do something in person even better. Stay tuned because I’m gonna have a great post coming up on ideas to earn more on the side.

Stay Focused on Your Goal

To round this out, the last thing I wanna tell you is stay laser-focused on this. It is really easy to get discouraged on debt. Every month you’re paying this money and paying this money. You don’t see anything for it. It’s not like….it’s gratifying when you go to the mall and you buy a, I don’t know, if you’re into shoes, let’s say you could buy that awesome new pair of shoes. If you’re a guy you might want those great new Michael Jordan sneakers or whatever they’re coming out with now. Ladies, you might want that hot new skirt. But what does that get you in the long run? It makes you feel good for a few minutes but you might end up paying for it for awhile especially if you put in on a credit card.

Every time you make a debt payment, yeah you don’t get that gratifying feeling but try to get into that mindset of look that balance is getting smaller every time you make a payment. It’s a little smaller and a little smaller and a little smaller. Chart that out and look and see it’s getting down and down and down and eventually it will hit zero and then you’ll have all that extra money that you’ve been putting into debt every month to go buy that new pair of shoes or that new skirt. Because once you’re out of debt you have the financial freedom to do a little bit more of what you want – to travel more, to shop more. But of course that also means save more so don’t get too far ahead of yourself on that spending. There’s lots of resources I have on the website about saving and how to invest.

But again today I just wanted to talk about debt. And that is the strategy that I would say is the generic get-out-of-debt plan from Personal Profitability. And you can’t really be profitable if you keep paying debt every month. You just got to get rid of it and then move forward. And the only way to move forward is to start with that first payment and that first dollar that you can put in there and start earning that first dollar on the side. Living a frugal-mean lifestyle on the way. If you look at yourself like a business, what do business do when they have debt? They make those payments and they try to pay it off as quick as they can to avoid interests so they can be more profitable. And that’s what we’re all about here at Personal Profitability.

So thanks very much for listening to this point. If you love the episode please take a moment to rate it on iTunes, maybe share it with a friend. I don’t have any other advertising other than word of mouth. So if you love it, it would do me a little favor if helped you out, help me out. Share it with a friend, try to grow the audience. It doesn’t cost you anything more than a minute of your time.
That’s all for today. So thanks everyone for listening and being a great part of this community. And until next time, stay profitable.