Today, in Day 5, we will cover a variety of things concerning debt – the reduction of debt and how to use the debt roll down principle. We will also review how to use credit cards effectively without increasing debt, as well as reading about some additional ways to save money.
The following checklist will assist you in keeping today’s tasks straight: Read Getting out of Debt by Steven B Smith
- Create a list of debt obligations
- Create a debt elimination plan using the debt roll-down principle
- Read Saving some extra money is easy!
- Read Save a little extra…
Getting out of Debt
By Steven B. Smith
Getting out of debt is one of the key elements to becoming financially fit. In a society driven by financial excess, reaching this goal is increasingly difficult but can be done with some determination and the right tools to help you get there.
According to a survey conducted by Impulse Research Corporation, 59% of Americans stated that they regularly maintain a household budget. This number is shocking considering the average household debt in America has grown to $18,700, with credit cards and auto loans combined. This ever-increasing debt load suggests that American families continue to spend more than they make. Obviously, many of the methods being used to manage household finances are not effective. Read the entire article …
Create a list of debt obligations
Before we can start to eliminate your debt, we need to first understand what your debt load is. Download the Debt Obligations Worksheet and let’s create a list of your debt obligations. We can use the example below to help us complete this task. If you used this worksheet in the ‘Define your Net-Worth’ exercise in day 2, simply use this section as a review to ensure that you have not left anything off.
In your list of debt obligations you will want to include the creditors name, the interest rate, the minimum amount due each month, and the balance on the account or loan. Make sure to include all debt accounts that you have – auto loans, mortgage, credit card balances, store accounts, personal loans, etc. Review your statements and monthly bills to ensure that you have included everything.
Once you have all the items listed, you will want to review your Monthly Spending Plan (that you created in Day 4) to ensure that you have included envelope spending accounts for each of these debts payments. If you missed any, take a minute or two now and revise your monthly spending plan.
The last thing we need to do before moving on to your debt elimination plan is to prioritize your debts in order of either lowest balance or highest interest rate. Often times the list turns out in a very similar order with either method. Number the items and have the paper handy during the next phase of today’s lesson.
Create a debt elimination plan using the debt roll-down principle
One of the most crippling effects on personal financial fitness is debt. Debt is every bit as damaging to your financial health as extra weight is to your physical health. Losing your debt load can be the most financially liberating thing you will ever do; while continuing to add to your debt, will likely be the most financially restricting thing that you can do. To successfully tackle personal debt, the first thing you must do is stop creating more. Simply put – if you continue to spend more than you make, you will never be debt free.
Let’s use the debt roll-down principle that was introduced in Steve Smith’s article, “Getting out of Debt” to create your plan. We will use this method to create a debt elimination plan designed to rapidly eliminate all of your debt.
Using an envelope system is the key ingredient to finding success with this approach. The debt roll-down principle works by maximizing the total monthly payment that you can make toward debt repayment. Each time you pay off a debt, you add the payment for that debt to the monthly payment for the next priority debt (from your list of debt obligations), which accelerates the rate at which that second debt is paid. When the second debt is paid, you add the payment you have been making on this debt to the monthly payment for the third priority debt. This process is continued until all of your debt has been eliminated. The key is to continue making the same aggregate debt payment each month, even after some debts have been eliminated. Following this debt elimination principle can often assist you in eliminating all of your debt, including your mortgage, in as few as seven to eight years. Read the entire article...
Saving some extra money is easy!
By Steven B. Smith, author of Money for Life, Budgeting Success and Financial Fitness in just 12 weeks (
www.moneyforlifebook.com)The first step to finding a little extra savings each month is to find out exactly where your money is going. To do this:
- Track your purchases and put together a spending plan.
- Make sure your spending is less than or equal to your income.
- If your spending is more, make adjustments to your spending plan by reviewing your spending categories.
Once you know where your money is going, it’s easy to find ways to make small adjustments that really add up. Read the entire article…
Save a little extra…
By Steven B. Smith, author of Money for Life – Budgeting Success and Financial Fitness in just 12 weeks (
Saving additional money each month is really about discovering where you’re paying too much for goods and services. Once you know where your money is going, it’s easy to find ways to make small adjustments that really add up. Look first at reducing your spending in discretionary categories – such as eating out, lunch, entertainment, clothing, and personal items – can often be reduced. If you cut a little in each area, you likely won’t feel the pinch, but you can still make a difference in the big picture. Read the entire article…
Congratulations on completing the Financial Fitness University Spending Management Course, brought to you by Money for Life!