How To Pay Off Bad Debt And Save Your Future
If you read my previous article, you know that the typical American pays $279,002 in interest payments over the course of their life. At an annual income of $50k and accounting for the fact that you need to earn more to pay income taxes, it will costs you seven years of your life. Money is just the time it took you to gather it, after all.
I don't want to spend seven years of my life in servitude to the banks. I don't think you do either. So let's not do such a silly thing, ok?
Bad debt is money you borrow to finance to buy things you don't need or can afford to impress people that could care less. These things do not produce income or grow in value - they are not assets. Things like clothes, dinner out, vacations, electronics, cars, and any other junk you don't need.
Which debt should you pay off first?
The worst of the bunch is any debt from a payday lending/car title place. I hope you do not have any debt from these places, but if you do you need to pay off those people as soon as you can!
So you don't have any loans from these places, good for you! Which debt is next?
None.
What? I thought we were paying off our debts! We are, but first we are putting together a small emergency fund of $1000-1500 in case we hit any problems. Now we have a bit of a safety net to fall back on if trouble comes a'knockin'.
Next you will pay off the highest interest rate loans you have, probably credit cards. Credit cards can easily run in the 20%+ interest rate range. List these out by amount and interest rate. You can grab this information from your monthly statement or online. If you can't find that information, give them a call.
You need to attack this debt as fast and as hard as you can. 20% is an outrageous interest rate, it will ensure you are paying this off for years if you only make the minimum payments. The interest you are paying is your life! You trade hours of your life for money to just hand this over because you wanted something before you could afford it.
So buckle up, kill off any excess spending other than your basic expenses and funnel this money into your highest interest rate debt while making minimum payments on the rest.
Speed up the process by obtaining extra income or selling things you no longer have a use for. Get a second job or find a side hustle that you can do, there are so many in our modern gig economy. I have made thousands of dollars as a secret shopper and selling things on eBay.
The more you are working the less time you have to be bored and spend money!
As you pay off each loan, roll all the money into the next one and then the next. The debt payoff train will not be stopped until it reaches the final station!
Ok, so you hustled your butt off to pay off your bad debt – congratulations! What now?
Now you can increase your emergency fund to a few months of expenses and then start paying off debts like any student or medical loans , as well as start investing for your future. If you are lucky enough to have a job with retirement plan matching you will want to put at least that amount in while you are still paying off any remaining debt up to your mortgage.
So if you get a 3% match, you will contribute at least the 3%. It is a great benefit that you should take advantage of. You can put more aside if you wish.
If you don't work where you get a match then you should put some money aside each money to fund your yearly IRA, probably the Roth IRA. The annual contribution limit is $5,500 per year, aim for a minimum of $1,000 saved to transfer into this retirement account per year while you are still paying off debts up to your home mortgage (if you have one). This is only about $83 a month to put aside, very achievable.
When your only debt is your home mortgage you can step up your investing game. Aim to save at least 15% of your income specifically for retirement accounts, the more the better. Remember that this money is going away and is hard to get to until you turn 59 ½ years old.
You now have more choices as you are in a much better position. You have all this cash that you haven't been spending since you have been paying off your debts. You have allotted 15% of your income to invest in your future, and only owe money on your house.
If you don't have a mortgage, but want to become a home owner you can start to save up a 20% down payment to avoid having to pay PMI.
If you hate paying interest like me or just want the peace of mind of having no mortgage on your home you can attack it with all your remaining funds.
If you like seeing your investments grow more than seeing your mortgage shrink you can increase your retirement allocations to a higher percentage.
That's it. There is no secret. You just have to change your mindset about money. It is simple, but not easy. When you have no payments, the wealth you can generate is immense. It won't appear overnight, but as long as you keep on fueling the train it will take you to the station you set as your goal.
Close your eyes and imagine a day when you owe money to no one. Everything that hits your bank account is your to do with as you wish. You have no debt - no credit card bills, no car payments, and no mortgage payments. How fast could you become wealthy? Fill your mind with that desire. Obtain it.
You are the conductor of this train, and only you can control what happens.
All pictures from Pixabay. As always, do what you want to do.
Read how much ONE share of Coca-Cola is now worth if you purchased it from the stocks IPO. Hint: It is one amazing amount!
Good info. Glad to see others posting finance related articles. We are a small group thus far.
That we are, I have always enjoyed the articles of yours that I have read.
Great ideas here....that's pretty much how we did it too....pay off the biggest interest debt while still making payments on the other debts, then taking the $$ from the biggest debt once paid off and applying to the next debt all the way down. But you have to not spend if you don't have the cash to buy something. Then the money can be applied to savings and budgeted for what you need.
I love the last like - You are the conductor of this train and only you can control what happens.
It reminds me of the many budgets I made over the years and complained how "they" didn't work.....the problem was, I didn't work them.
It's not flashy or sexy or glamorous, but it is how it's done. You put your adult pants on and get to work cleaning up the mess you made.
You spend less, possibly earn more, and beat down the debt. If you stick to it, you will win in time.
Like you said, you can't spend it if you don't have it in cash and you need to continue to work at it.
Great post.
I have the feeling that you have another post lined up about HOW to invest some of that extra income once you have resolved your debt.
If so, let me add this:
The best piece of advice I can give is that you should never quit your job to start a business, that is not ALREADY making a profit.
If you have an income source (like your job) that is guaranteed, don't throw that away in search of another source that is not guaranteed. I'm speaking from personal experience.
Note that I am not saying "don't start a business"; instead, if you want to create a business, do it in your spare time. This is very hard, and there may come a break point at which you can't earn any more unless you devote more time to it.
Just make sure you aren't throwing away money in the pocket!
The other side to this is that I have found that businesses do not like hiring people once they have been self-employed, so it may be harder to get back into the job market once you have left it.
I'm not sure about the investing advice, other than to do it! Everyone has their own level of risk, but I might write a few articles on some options.
I believe everyone should have at least one side gig. Not only does it possibly provide extra income, it shows you that you CAN do it. Many businesses have been created out of the side gig.
Good tip on the self-employed job market, I was unaware.
So true! Aside from my main full-time teaching job, I run a small company, Wake-Up Call, that provides educational services. It's a small gig, like you say, but in a good year it brings me between a fifth and a third of my total yearly income. And it requires zero financial investment, just my time, energy and creativity.
I love side gigs, not only can they bring in income while you have a main job - if you lose your job you can ramp up the side gig to provide some additional income while you are unemployed.
I might have to write an article on the benefits of a side gig.
I'll love to read it, if you do! :)
Great post, as always.
I am proud to have stayed debt-free all my life. I even didn't take a student loan with a low interest rate from the Swedish state, when it offered. No sir, I want to only spend the money that I have earned first, not the other way around.
I have managed to save enough money to get me through 4–5 months of living in Sweden, if I lose all sources of income at once. It could last me a year and a half, if I had to return to my parents’ house in Russia.
I manage to save roughly a half of my monthly income and put it into savings and investments. I have invested about one-third of my liquid assets in Bitcoin. Now this particular investment comprises about 3/7 of my liquid assets, thanks to the recent increase in price of Bitcoin. I also invest in stock market and in small Swedish start-ups whose founders I know and in whose business ideas I believe. And I put aside a small amount of money every month and buy a few grams of gold with it. I also have a private pension savings plan, on top of what the Swedish state and my former employers will pay me, when I get old.
The only regret I have is not having enough savings to invest in Bitcoin, when I first learnt about it (back in 2012). But, to paraphrase one of your previous posts, @getonthetrain: “the best time to buy Bitcoin was seven years ago, the second best time is today”.
Please keep sharing your wisdom on Steem: the people need to learn this!
Staying away from any debt is very commendable! I started out on a good path but became lost. Luckily I didn't hurt myself too badly, but I did fall behind due to the lost years.
I remember looking at bitcoin when it was $2.64, but I wasn't a believer. I couldn't see how it could do well backed by nothing. Well, that way of thinking has changed.
Your investments seem well diversified. You are surely far ahead of the crowd when it comes to having a great future, especially as you will continue to increase your wealth.
Thank you for the kind words, I will continue to write my thoughts on financial matters. :)
Ok, you are now officially my new financial advisor. Hope I get "mate's rates" in terms of your fees! :)
My first act as your financial advisor is to caution against using me as your financial advisor. lol :D
nice post
Indeed
Much thanks you two :D
Great education, worst time of year for anyone to buy things for people they don't like. Its a cooperate trap!
Yea, my office asked if I wanted to be in the secret santa - I said no thanks. I don't need some random crap, and I certainly don't need to buy some random thing for someone else. How about we buy things for ourselves, that way we get what we want - if we even want something at all.
So true, the key word is in, `want or need'? No wonder depression rates spike in January!
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