How To Become Debt Free – FAST.
Paul’s charge to us in Romans 13:8 ‘to owe nothing but love’ is a powerful reminder of God’s distaste for all forms of debt that are not being paid in a timely manner (see also Psalm 37:21). At the same time, the Bible does not explicitly command against all forms of debt. The Bible warns against debt, and extols the virtue of not going into debt, but does not forbid debt directly.
The wisdom of the Bible teaches us that it is usually not a good idea to go into debt. Debt essentially makes us a slave to the one who provides the loan. (Proverbs 22:7) At the same time, in some situations going into debt is a “necessary evil.” As long as money is being handled wisely and the debt payments are manageable, a Christian can take on the burden of financial debt if it is absolutely necessary.
With that being said, I feel ones primary goal should be to become debt free. Excessive debt is a burden in our lives. We rob ourselves by failing to adequately care for our children and at the same time, save for retirement. We also rob ourselves from the abundance God wants to bless us with. The blessing and joy that manifests itself in our lives when we give freely to others. (Acts 20:35, Luke 6:38, 2 Corinthians 9:6-8)
Whether it’s consumer debt on credit cards, auto loans, installment or student loans, or a mortgage, most people find themselves weighed down by debt at some point in their lives. By learning how to pay off debt fast you can release this burden and remove some of the stress from your life.
Today I’m going to show you how to pay off all your debt as fast as possible using the Stack Method.
Step 1: Stop Creating New Debt
Most people do not receive training in handling money and how to live within their means. If you’re in debt then you’re probably one of these people and it’s time to bite the reality bullet. It’s going to be impossible to get out of debt unless you retrain your financial habits right now.
You don’t need more stuff to make you happy. What you need is financial peace of mind. What you need first is an emergency fund and you need a clear planned path to a rich worry-free retirement.
So cut up your credit cards or freeze them. I mean this literally. Put them in a plastic container of water and stash them in your freezer. Then, when there’s an opportunity to spend, you have time to thaw out (you and the credit cards) and really decide if you need that purchase.
Step 2: Establish an emergency fund of $1,000 to $2,000
You might be wondering, ‘Why is having an emergency fund important’? Well, if you don’t have any money in the bank and an emergency does happen, how are you going to pay for it? For most people, credit cards become the funding source for those emergencies. If you are trying to get out of debt then you need to put a buffer between you and debt; that is exactly what an emergency fund does.
Set a goal, perhaps $2,000, and do not spend it on anything except unforeseen emergencies.
Step 3: Create a realistic budget and stick to it
Developing a budget that tracks your income and your expenses is crucial to getting out of debt in a short period of time. It will help you gauge where you are with your finances so that you can move forward toward your goal. It will expose whether you have money left over, which is called a surplus, or if you are in the negative, which is called a deficit. The goal is to increase your surplus and use that money to pay down your debt using the Stack Method.
Budgeting is hands down the most important way to understand and take control of your finances. Creating a budget can be a daunting task and it requires that you fully commit to tracking your expenses, analyzing the results, and then making improvements on a line item by line item basis.
Maintaining and tracking your budget is easiest done online using a free service. Here are a few options…
If you want to go old school Printable Paper has four forms you can print for free. You will find Daily, Weekly, Monthly, and Yearly budget tracking forms.
Step 4: The Stack Method
“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness, that most frightens us.
We ask ourselves, who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be?
You are a child of God. Your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won’t feel insecure around you.
We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It’s not just in some of us; it is in everyone.
And as we let our own light shine, we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” Marianne Williamson
First you will need to make a simple chart, an example is below.
Write down the creditor in column 1.
Total balance in column 2.
The bills monthly payment in column 3.
Divide the balance of the bill by the monthly payment and write the answer in column 4, for each creditor.
Column 5 is Payoff Priority. The lowest division answer (Column 4) is priority 1, the second lowest, priority 2, and so on.
Now you have a Priority List on which bill to payoff 1st, 2nd, and so on.
|Balance||Minimum Payment||Balance Divided By
|Lowest Column 4 Value is Priority 1 Debt|
|Credit Card #1||#||#||#||#|
|Credit Card #2||#||#||#||#|
The next step is to establish your Accelerator Margin. (AM)
Try to make your AM 10% of your take home pay. If your take home pay is $3,000 per month you would want to free up $300 for your AM. This might sound like a lot but if you write down all your monthly expenditures and create a budget that you stick to, you can do it.
I had 3 large credit card bills and was sending each an extra 100 per month over the minimum payment, trying to get them paid off quicker. So by just paying the minimum I found my 10% AM.
OK, so you take your AM and add it to the payment for your Priority #1 bill. Once that’s paid off you add your AM and the Minimum Payment of Priority #1 and accelerate your Priority #2 bill. Once that’s paid off add your AM with the minimum payments from #1 and #2 and send it to #3 and so on.
Below is an example with a $300 AM.
Bill’s wife’s car was his Priority #1. He added $300 to her car payment and sent them $695 per month and paid it off in 13 months.
#2 was Bill’s truck which had a payment amount of $405. He took the $395 minimum payment from the #1 bill, added the $405 and added the $300 AM and sent them $1,100 per month and paid it off in 15 months.
#3, 4, 5, and 6 were credit cards. Bill took them one at a time, adding $1,100 to the monthly payment and as one was paid off he folded each ones minimum payment into the AM and paid them all off in 17 months.
By then his Sleep Number bed and new central air unit was already paid off.
Now the only bill he has is the mortgage on his house. He has $1,505 of freed up cash from his prior debts to add to the mortgage payment. The house should be paid of in about 4.5 years.
Having a goal and a plan is better than not having one. Even if something happens and you have to hold you AM 1 or 2 months for an emergency.
Reward yourself as you eliminate each debt. Take vacations but have an entertainment budget. Set aside $50-$100 each month so you can pay cash, or use your debt card. Do not use a credit card to pay for vacations, lunch, dinner, etc.
Now Bill’s wife needs a new car so he opened a savings account and is putting the $1,500 in it every month, instead of paying it on the mortgage. After 12 months we will have a good down payment. His plan is to find a low mileage car that’s 1-2 years old, letting someone else take the depreciation hit, and might even have enough to pay cash for a really good used car.
Concluding Friendly Advice
Try to pay cash for everything. If you buy things on credit it will cost you more due to interest.
Try to have $1,000 to $2,000 in a savings account for emergencies. For me personally, having $20,000 on hand is ideal. I use Westfield Bank in Ohio. They pay about 2% in interest on the checking account. To get 2% I have to have direct deposit, use the debt card 12 times each month, and go paperless statements. The account paid $343 in interest last year.
When you are near to reaching debt-freedom you want to take advantage of free money via Credit Card Rewards Programs. Do an Intranet search to compare the different offers out there. I use Kroger’s Master Card. The bulk of our grocery shopping is done at Kroger’s. Not only do we save 15-30 cents off a gallon of gas we get points for ever dollar we charge on the card, which translates to about $70 of spendable Kroger checks-in-the-mail per quarter. The trick is to charge necessary items like groceries and gas and pay the card balance each month. You could even make your car payment or utilities with a credit card then pay the card balance every month. It’s all the same, pay your monthly car payment or electric bill directly, or use a credit card to get rewards, then pay the credit card balance each month.
Put $50 away every month for Christmas presents. Do not charge presents on a credit card. Do not go out to eat and use a Credit Card. Try to pay cash (debit card). Do not carry Credit Cards around with you.
The statistics is that there is over 2 Trillion in debt on credit cards in the U.S. It breaks down to about $7,000 in debt for every adult in the US. Some have less, some a lot more. It a vicious trap to get into.
With a little effort and control you can be totally debt free in a realistically short time.
If you add up every bill, house, cars, cards and interest debt, like I did, you might find you need $2,800 per month to pay them all. If you could save the $2,800 per month you would see you would have almost $336,000 in ten years. This doesn’t include any compounded interest!