The Personal Finance Podcast - The Fastest Way to Pay Off Debt

Episode Date: June 17, 2020

Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Episode 6: The Fastest Way to Pay Off Debt  In this episode we cover:  Why Debt is like Miley Cyrus  Reasons Debt Brings You Down How to Decide if You Want to Pay Down Debt  The Fastest Way to Pay Down Debt  The Debt Wrecking Ball  The Debt Snowball  Resources in this episode:  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App So-Fi LendEDU Learn more about your ad choices. Visit megaphone.fm/adchoices

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And today on the podcast, we're going to be talking about how to pay off your debt the fast way. And let's just call it like it is. Your debt is a burden. And you need to get rid of your debt once and for all. because it's holding you down. It's a chain that is holding on to your personal finances that needs to be eliminated. And what my goal is for this episode is to show you exactly how you can pay off this debt as fast as possible. So we're going to go through a couple of options for you to be able to pay down your debt.

I'm going to show you the wrecking ball method, and that is a method that's going to be the fastest way to pay down your debt. But we also know that money is extremely psychological. So I'm also going to show you the snowball method, which is a method that's been popularized by a lot of financial gurus. But it is a good method for people who really need that extra motivation to be able to pay down their debt as well. So we're going to get into both of those methods, and we're going to go through exactly how you can pay down your debt as fast as possible. And I still remember the day that I got my shiny new credit card.

It was right out of college that I got a credit card, and I wanted to build up some credit for myself. And since I wanted to build up that credit, I knew I needed to run my card and have a few transactions on that card. So I decided to run that bad boy through a few registers. I bought some groceries, maybe a little gas, and some other things I needed. And I ended up racking up about $350 that first month. And I got that statement in the mail. And at the very bottom of that statement, the credit card bill said, in bold letters, amount due $24. And I couldn't believe my eyes because I could say,

spend $350 and all I had to do was pay back $24 and it had to be too good to be true. It was ringing in the back of my head. This has to be too good to be true. Of course it was because as I kept reading, they're going to charge you an 18% interest rate on your remaining $326. My question to myself was, did this credit card company think I was a moron? And unfortunately, they did. And it's nothing personal, but this is how they make their money. And they trap people into a scheme over and over and over again. See, debt is a national crisis. If you're in debt, you're not alone because the majority of Americans are actually in debt. Debt has become so easy to obtain. It's become so easy to get a loan that it is more common to have debt than to not have debt.

So you wouldn't be pushing that fancy whip if it wasn't for easy car financing. It's something that's promoted as good. It's something that promoted as helpful. And right now, there is currently more debt in the U.S. than there ever has been in the history of the United States. There's over $8 trillion in home mortgages. We're approaching almost $2 trillion in student loans. And there's over $3 trillion in consumer debt. So auto loans are also at their highest. Consumer debt's at its highest. Student loan debt is at its highest and mortgages are at their highest. They've ever been historically. So here's the average amount of debt for each age group. People who are under 35 have $67,400 in debt. And that number has gone up dramatically. Reason being, you guessed it,

student loans. People between the ages of 35 to 44 have on average in the U.S. $133,000 in debt. People between the ages of 45 to 54 have about the same, $134,000 in debt. People between the ages of 55 and 64 have $108,000 of debt. And this one surprised me because your debt level should be going down as you get older because you're advancing in your career. Your income is going up as you advance in your career. But for a lot of Americans, their debt level is still pretty high. And then between the ages of 65 to 74, the average is 66,000. And 75 and up is 34,500. And this shows that the average American is carrying a large amount of debt. And a lot of Americans are approaching six figures in debt. Now, home mortgages have a large hold point in that. And that's understandable. If you look

back at the numbers back in the 80s, the average American hardly held any debt at all. And it was somewhere around $5,000. So we need to figure out a way to crush this debt because it can hold you back tremendously in your personal finances. And we need to ring this bell as true to avoid debt at all costs if you can. Now, later in the podcast, we're going to get into what people call good debt as well, and we're going to get into some of the factors that may make that not as true as people make it out to seem. See, I'm always talking about how money empowers your life, and it has nothing to do with

pinching pennies, but you use your money to put you in the driver's seat. You're in charge of your life. And money has the capability of changing your life for the better. It gives you the opportunity for pure freedom. But if you're carrying debt, you're going in reverse. you're going backwards and debt takes away that freedom from you. It's crippling you and it's crippling your future. So let's get into some of the reasons why debt brings you down. So we need to get into the reasons why debt brings you down so that you have an understanding and can

make better sound financial decisions in the future. And maybe you won't take on as much debt once you realize how much your debt is actually costing you. And the first reason is that debt takes away your cash. So debt takes away cash that you make. It takes away your income. It takes away your income. and then you can't put that cash towards what you want it to do. You can't use your money exactly how you want it to create freedom for you. The beautiful thing about cash is that you can allocate it towards anything that you want. You can buy more of the things you want. You can allocate it towards your kids college fund. You can allocate it to help aging parents. There's so many things that you can do and so much freedom you have with excess cash,

but debt eats away at that and debt takes it away from you. The second thing that debt does is a away your opportunity. Debt has an opportunity cost and it takes away from your financial freedom and your future because you can't invest as much money because you're giving your money away to your debtor. So think about this in terms of investments. So say you invest in an index fund every month, but you also have to pay an extreme portion of your income towards your debts. Well, those debts aren't just the cash that you're putting into the investment. They're also taking away from your future investments value. So every dollar that you put into your index fund or whatever investment that you have, that fuels the fire and it compounds and it creates interest. And it starts

to snowball and begins to grow. So you're losing on future value of money and current value of money. And that is a powerful, powerful thing that debt takes away. That is the biggest compounder and the biggest power you have with your own money. It's the biggest control you have is to make your dollars work for you and debt takes that away from you. The third reason debt brings you down is you are now enslaved to your job. Why? Because now you have to go to work every single day to pay those debts. Otherwise, the credit man's going to come a knocking, and he's going to come knocking at your door, and you're going to have to pay even more money if you're late on your payments. So you have to get up and you have to go to work because you've got to pay somebody else's bills. And that's never a

position that you want to be in. And it's a reason and an amazing reason to get, rid of debt as soon as possible. And the fourth reason that debt brings you down is it increases your stress and anxiety. Debt can make you feel like there's an entire mountain sitting on your chest and it can increase pressure on you. This pressure can build and a lot of studies have been done on people who are in debt and they're actually experiencing the same feelings that addicts feel. You feel things like guilt. You feel guilty for taking on this debt and putting this burden on your family. You feel shameful for the same reasons. You feel remorse and worst of all, you feel helpless. And if you're already in debt and you realize you need to get out, you need to get out of debt,

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You may be thinking something like, well, I have a low interest rate on a certain debt. So should I actually pay off that debt or should I invest that money in the market? Is my money better served in the market? And the quick answer to that is that it depends. And it depends on two factors. Your interest rate and your comfort levels. So an example of this would be if your mortgage interest rate was 4%, but on average you're investing in an index fund that may make 7, 8% somewhere in that range.

Would you be better off served just investing the money and paying the minimum minimum payments towards your mortgage. And it's a valid point and it's a valid thought process because we want to maximize our money and maximize our money's utility. But I have a couple rules of thumb to think about this. Number one, if your debt is 3% or less, then go ahead and just pay the minimum payments and then invest the rest of the money. So we had a couple years ago, we had a Honda Accord that we bought new. And when we bought that car, the interest rate was less than 1%. It was 0.9%. And so I immediately decided I'm not going to pay this thing down fast at all. I'm just going to go ahead and get a loan on it for that 0.9%. And then the rest of the money,

I'm going to put it into index funds because I think my interest payment on that per month was $8. And that cost was worth it to me to hold on to that loan and let my money do work in other places where it can work much harder for me than that 0.8% interest rate. Number two, if your debt is between 3% to 5% then you got to just use your best judgment because in this range, you're starting to approach a level where you can consider paying off that debt because you're getting closer to the market return. And what I would say is, if this debt's keeping you up at night and it's bringing on stress and it's bringing on anxiety, go ahead and just pay it off.

Just get rid of it. Get it out of your life and move on. And number three, if your debt is over 5% paid off now. Do it as fast as you possibly can. Don't wait. don't delay, get rid of that debt. Now, within all three of these categories, like I was just saying between the 3% and 5% category, if debt is keeping you awake, even if it's below 3%, and it just bothers you and you don't

want to have it anymore, then get rid of it. Get rid of the debt right away because there's no reason to have it if it's increasing your stress and anxiety, because all financial stress and anxiety does is hazes up your decision making. And you want to make good, sound financial decisions. You want to have a clear mind financially so that you can make the right decisions for you and your family. Now let's get into the meat and potatoes and the fastest way to get rid of your debt, which is the debt wrecking ball. So the fastest way to get rid of your debt is what I call the debt wrecking ball. And where to get that name? Because debt is like Miley Cyrus and you need to come in

like a wrecking ball. The debt wrecking ball is a no nonsense. It doesn't get cute. It doesn't do anything for your emotions. It is the fastest way to get rid of debt. And it's based on math. So I'm going to give you the steps on how to go through the debt wrecking ball and how to get rid of your debt as fast as possible. And there's five steps to the debt wrecking ball in order to get rid of your debt, get it out of your way, and move on with your life. Step one, you have to list all your debts in order from the highest interest rate to the lowest interest rate. Doing this is going to give you your attack plan. It's going to give you the order that you're going to attack all of your debts, because you want to identify the highest interest rate and you want to take that debt down.

The second step is you want to refinance your loans for a lower interest rate. Now, there's a couple caveats to this. If your debt totals out to say $10,000 or below, or you have a low volume of debt, then you can skip this step because I don't want you wasting your time trying to refinance your debts when you could just be spending time focusing on paying it off and you'll have it paid off in less than a year.

So if you think you can pay off your debt in less than a year or two, then just do not refinance. Go ahead and just focus all your time, your efforts on paying down that debt. But if you have a large amount of debt and you hold high interest rates, then you're going to want to refinance that debt. And there's a couple of companies that can do that student loan companies like SOFI. There's a company called Lend EDU. And I'll leave links to these in the show notes. The reason why you want to do this is because you can drop your interest rate from say 8%, 9%, something like that all the way down to 3, 4, 5%. And in some

instances, especially with credit cards, you can sometimes roll it over for 0% for a year or different things like that. So this is something you definitely want to consider if you have a large chunk of debt because you want to get those rates down because you're going to be paying less money over time. The third step is to cut back on things that don't bring you value. So I personally would cut back on all splurges. I would cut back on anything that doesn't bring me value at all. I would eat out less. I would spend less on groceries. I would cut back on any excess because I know the math and you need to get rid of this debt as fast as possible. Last month alone, I just made over $1,000 on offer-up because I'm about to sell my house and I was just getting rid of stuff that I don't want anymore.

And I made over $1,000 on offer-up. And this is something that you can do as well if you're trying to pay down your debts. Just get rid of the crap you don't want anymore. Get it out of your house, get it out of your hair and sell it. You can make some decent money. It doesn't matter how small it is. Even every $10, $15, $25 is one step closer to you paying down your debt so you don't have to worry about that debt for another month. So cut back on the things that don't bring you value and sell the things that don't bring you value. And then step four, throw every extra dollar you have at that highest interest rate and then pay minimum balances on all the other debts. So you're going to treat that highest interest rate debt and you're going to go to war with that highest interest rate debt.

The rest of the debts are going to pay off the minimum, you're just going to pay down the minimum balances on all of them, just the minimum that you have to pay and continue to do that until that highest interest rate debt is eliminated. So you're going to take off the minimum. You're going to Take every extra dollar and you're going to throw it at that high interest rate debt. And you'll begin to see that balance fall because you're throwing excess money towards your debt instead of just paying the minimum balance on all of them. You're going to be throwing extra cash towards that debt and that balance is going to fall at a rapid pace. And you're going to be amazed at how fast it's going to fall because you stayed focused and you focused on the task at hand.

And let that falling rate motivate you. Continue to stay motivated through this process. And then step five is once you have the highest interest rate debt, knocked out, then move on to the next highest interest rate debt. And once you have all these debts eliminated, one by one, by one, you knock them all out, go ahead and have a party. Pop some bottles. Then shift all of your money towards investments.

And you're going to be amazed at the compound effect of this. And consider what we talked about before. If the debt doesn't stress you out extremely and you move down the list of your highest interest rate debt down to the lowest and you get to the lowest and say it's 1, 2%, then consider starting to invest then. that's the point where your money will reap higher benefits if you invest than if you go ahead and continue on paying down that debt at 1 to 2%. And this is by far the fastest way to pay down your debts.

Because mathematically, you're eliminating the highest interest rate first, which is working against you the fastest. But there's another popular method that's out there that I'm going to go through because it's worked for a lot of people and it's worth talking about. A lot of people want to write this off because it's not mathematical. the fastest way to pay down your debt, but it is the most motivational way to pay down your debt, and it may work better for you if you need that extra bump of motivation. So let's get into the debt snowball. So the alternative method to the debt wrecking ball is the debt snowball. And the debt

snowball is obviously not my first choice to pay down your debt because I want you to do it the fastest, most efficient way. But there's no denying it's worked for plenty of people. And that's why we have to talk about it. It has to be a proposed option. Because you got to understand that that when you're talking about personal finance, it is 80% behavior and 20% head knowledge. And what the debt snowball does is it attacks your debt from a psychological perspective. So here's how the debt snowball works.

You're actually going to go at your debt with the lowest balance first. And what this does is it gives you a feeling of a small win so that you're motivated to keep pursuing paying down your debt. And it makes sense because a lot of us need instant gratification in order to push farther and we want to see results right away, especially in this attention economy, we have to see the results right away.

And the debt wrecking ball is a much slower approach if your highest interest rate is a much larger debt than all the rest of your debts. So the first thing you're going to do is list all your debts from the lowest balance. Then, once you have that order, you're going to go at the smallest debt first. So for example, this could be something like you have a $700 medical bill, you have a $4,200 credit card bill, you have a $9,000 car loan and you have a $19,000 student loan. Well, the first thing you're going to do

is go after that $700 medical bill and you can have that paid off in a month, two months, three months, however long it takes you based on your income, and now you have that small win that that thing's gone and you only have three more debts to worry about. Then you go after the credit card bill,

which is $4,200, and maybe it takes you six months or a year to get rid of that. And wow, that feels great. Let's move on to the next one and you take out the car loan, which has already gone down because of the minimum payments, and it takes you one to two years to get rid of that. And then awesome, now you're going after the big boy, the student loan. And then you go after the student loan and after three, four, five years, now the student loan's gone.

And this is why it's motivating for people because they're paying down entire portions of debt and they see those balances go down to zero. And the reason why this snowballs and the reason why it's called the debt snowball is because once you pay down that first, that lowest balance, that first balance, now that extra money that you were allocating towards that low balance to pay the minimum payment is now going towards your next debt, and then it's going towards your next debt, and it just moves down the line. So it snowballs and you're compounding on your own debt. So it's definitely an efficient way to pay off your debt. It's just not the fastest way to pay off your debt. You have to kill your debt,

or your debt is going to slowly kill you. You have to have the desire to get rid of your debt. You have to have the mentality of an assassin and want to destroy it because it's a freedom-sucking leech that's taking away from your opportunity. And if you're constantly feeding your wants by eating out or buying clothes or doing things that are outside of your means, then you're going to have a really hard time paying off this debt. And all these things are fantastic if you find value in them. They're amazing for you if you find value in them. But if you're in debt, sometimes they're not appropriate to continue buying and continue spending your hard-earned dollars on. If you want it bad enough, a huge amount of debt can be paid off in a year or two.

But you have to want it bad enough. And if you're still living above your means and you're deep into debt, it is devastating to your finances. It's like taking all your hard-earned money, putting it in a bucket, riding on a roller coaster, and trying to keep as much of that money into that bucket as you possibly can. And all the while, down below, there's a bunch of debtors just collecting all of your money. That's what's happening to your income when you're in debt. You have to reward your future self because your money can work harder than you ever can. But remember this. There are plenty of successful people who have made the mistake of going into debt early on in their life, and they've clawed their way out of that

debt. And they've become extremely wealthy after taking on that debt. And if you look at some of these examples, their debt actually made them financial savvy because they knew how it felt, they knew how terrible they felt when they took on that debt, and it motivated them to get out of that situation and go ahead and turn their finances around. And you can do it too if you're in debt. You can turn your finances around. This is your time to put your foot in the ground, draw a line in the sand, and take over your money. You made a mistake. So what?

Now it's your responsibility to get out of it. And now it's time to take control of your money. You can build an amazing financial future. You can build an amazing, amazing portfolio of wealth. And this is the first step. This is the first step. Get out of debt first and avoid debt going forward. Don't make this mistake twice.

Get rid of it. Forgive yourself and move on. And once that debt is gone, you can start playing some earthwind and fire and have a celebration. because now you can start investing for your financial future and you can start using your money for the things that you want. It may feel like you're not in control, but you're in control of this ship.

And it's up to you to make the decision now to get rid of that debt. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving away a free one-on-one money coaching session with me. all you have to do to enter is subscribe to this podcast and leave a rating or review on Apple podcasts, then send it over to Andrew at dollar after dollar.com and you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much for listening. We truly appreciate it and we'll see you on the next episode. Have a great day.

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