Get Financially Fit!

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Liberty, Sancho, my friend, is one of the most
precious gifts that Heaven has bestowed on mankind.
-Don Quixote

I once went on an Outward Bound backpacking trip. On the first day of the trip the guides distributed the gear and food such that each of our backpacks weighed 40 pounds. Each day as some people got blisters or became fatigued; the guides redistributed the weight so that the entire group could travel the fastest. Since I didn’t experience blisters or fatigue, my backpack became a little heavier each day. Within a week I was a pack mule with a 60 pound pack. The lesson I learned on this trip was that as the weight of the backpack increased, my speed and enjoyment of the experience decreased.

In personal finance, having debt is similar to the weight of a backpack. When individuals incur increasing debt it’s difficult to achieve goals and stress levels go up. I challenge you to eliminate all of your consumer debt so that you can enjoy life more fully.

Here are the essentials to eliminating debt:

1. List your debts in descending order of interest rate
2. Live within your means
3. Cut spending and increase income to accelerate debt elimination.
4. Establish an emergency fund
5. Attack the high interest debts first
6. Make the challenge fun; reward yourself
7. DO NOT incur consumer debt again

List all of your debts in descending order of interest rate

The first step in eliminating debt is to take inventory of all of your loans, credit card balances, and account balances due.  Starting with the highest interest rate debt, write down the interest rate, minimum monthly payment, and the total amount due in the first line. Successively add each debt until you have written down all you’re your loans, credit card balances, and accounts balances due. Congratulations! You have now successfully defined your goal by writing down all of your debts that you want to eliminate.

A complimentary PDF debt elimination worksheet is posted at book resources 

Live within your means

Once you have listed your debts you are ready to begin the trek to eliminate debt from your life once and for all. The next step is living within your means. Living within your means requires that you pay as you go. Stop using your credit cards, purposely spend your money each month, and save up for large purchases. all of your debts current by making the minimum payments on time.

Cut spending and increase income to accelerate debt elimination

By living on less than you make you will free up money to reduce debt each month. I recommend that you further increase your available money by both decreasing your living expenses and increasing your income.

Evaluate all of your expenses and determine where you can save money. Can you cut back on eating out? Can you postpone going on vacation? Are you willing to temporarily reduce the quality of your life in order to get out of debt faster? For example, are you willing to turn off cable TV for the next 6 months?

The fastest methods to increase income are to work overtime or take on a part time job. I also recommend that you sell things that you no longer need or that you can’t afford. For example, you can sell a luxury items such as an additional car, boat, motor home, or motorcycle. Also consider selling your primary car and purchasing an inexpensive reliable car if your payments are keeping you from getting out of debt.

Establish an emergency fund

Once you are living with your means, you will want to establish an emergency fund. I recommend that you save up 25% of your take home pay so that you are no longer need credit cards for emergencies. This will be $500 to $1000 depending on your income. I recommend that you establish your emergency fund in a separate credit union or bank. Use discipline to only use emergency funds for true emergencies such as an auto repair or medical expense.

Attack the highest interest rate debt first

Once you have set aside your emergency fund then begin attacking your debts. Start first with the highest interest rate debt. Each month make the minimum payments to all of your debts then apply all of your extra money to the debt with the highest interest rate. Once the first debt has been eliminated, then work on the debt with the next highest interest rate. Within a short period of time you will be able to determine the amount of time that it will take to eliminate all of your consumer debts.

When you get to debts with interest rates of 4% or lower, you can go back to making regular scheduled payments on these debts. Say for example, you have an auto loan with a teaser 1.9% rate. I recommend that you not pay off this loan ahead of schedule, instead continue on the financial steps journey fully fund your rainy day fund. The rainy day fund which will be invested in money market, certificate of deposits, or I bonds will yield a higher return than 4%.

Make the challenge fun; reward yourself

As you eliminate each debt, reward yourself.  Taking a moment to celebrate each success, will invigorate and energize you for your journey.  The reward does not need to necessary cost any money. For example, you may take a walk on your favorite path or allow yourself to enjoy a TV show.  The reward process is important because while you are attacking your debts you are sacrificing your quality of life.

DO NOT incur consumer debt again

Once you reach the successful milestone of eliminating all of your debts, I challenge you to swear off of all future debt (with the exception of a house purchase).  For example, the next time you buy a car, save up and pay cash. Save by setting aside the amount of your car payment after your current car loan has been paid.  In time you can transition from buying reliable used cars to new cars that you can drive many years.  Always save up to purchase luxury items such as a television, a couch, a vacation, a boat, a motor home, etc. When you avoid loan payments you decrease your stress and increase your ability to build wealth.

 Follow your dreams, Achieve your goals!What is your debt elimination success story or advice?