Wellness
Wealth

How to Get out of Debt and Build Wealth

Before we begin today’s lesson on how to get out of debt you need to first understand the key role debt elimination plays during the wealth building process. Here are some very powerful quotes from the best money and finance book in the world “The Total Money Makeover” by Dave Ramsey.

“The most powerful wealth-building tool is your income. Ideas, strategies, goals, vision, focus, and even creative thinking are vastly important, but until you get control and full use of your income to build wealth, you will not build and keep wealth. Some of you might inherit money or win a jackpot, but that is dumb luck, not a proven plan to financial fitness. To build wealth, YOU will have to regain control of your income.”

Dave then goes on to say:

“The bottom line is that it is easy to become wealthy if you don’t have any payments. You may get sick of hearing it, but the key to winning any battle is to identify the enemy. The reason I am so passionate about your getting rid of debt is that I have seen how many people make huge strides toward being a millionaire in the short time after they get rid of their payments. If you didn’t have a car payment, a student loan, credit cards out your ears, medical debt, or even a mortgage, you could become wealthy very quickly.”

So with this information in mind, it’s now time to get started with today’s lesson on how to get out of debt – which is one of the primary steps during the wealth building process.

How to Get out of Debt – Power Roll Your Debt

There are many different terms that can be used to describe this process. For example, in his book “The Total Money Makeover” financial guru Dave Ramsey calls it the debt snowball — but for this lesson we will call it “Power Roll Your Debt”.

In a nutshell, this is how the Power Roll Your Debt works.

List your Debts – Start by listing all of your debts; this may include credit card debts, car loans, medical bills or even student loans if you have any for example.

how to get out of debtPay Off the Smallest First – You want to target and focus on paying off the smallest debt first. But while you’re focusing on paying off the smaller debt balances first, just make sure you’re making the minimum monthly payments on the larger debt balances. Also, when making the payment on your smallest balance, put every spare penny you have to paying that off first. By conquering that first small debt, it not only gives you a quick win, but also provides you an incentive to move forward and pay off the rest of the larger debt balances on the list.

Move to the Next Debt – Once you have your smallest debt balance paid-in-full, take that money that you were paying on that debt, and put it towards the next highest balance on your list of debts. With each debt that you pay off, the amount that you will have available to pay toward the next debt will grow even larger.

Rinse and Repeat – Just continue using this process until all of your debts are paid off.

Roll into Investments – When you have all of your credit card debts, car loans, medical bills and other miscellaneous debts paid off, you can then take that money you were paying toward debt each month and invest the money in yourself. I will explain in more detail what I mean by “invest the money in yourself” in the final step (step 5).

Note: If you have a mortgage, you will probably still be making payments towards that – since that will be the debt with the largest balance – but the process will be expedited because of the amount (monthly payment) you have to pay towards the mortgage will be much larger.

Before moving on, I need to make a key point about finance charges.

Key Point: Another key variable in this equation that I did not mention is the amount of cost savings you will experience on finance charges. The higher your power roll payment is, the sooner the debt will be paid off. And the sooner the debt is paid off, the less you will paying in finance charges in the long-term, thus accelerating the debt elimination process.

Next we will give you an example of how to Power Roll Your Debt using real numbers this time:

List of Debts Balance Monthly Payment New Payment
Credit Card A $500.00 $25.00 N/A
Credit Card B $2,000.00 $50.00 $75.00
Medical Bill $5,000.00 $75.00 $150.00
Auto Loan $9,000.00 $150.00 $300.00
Mortgage $150,000 $950.00 $1250.00

 

As indicated, you want to start out paying off the smallest debt first, and then after that debt is paid off, you then move on to the next debt with the smallest balance. So referring to the chart above, you want to start off by paying off Credit Card A. Once the balance for Credit Card A ($500) is paid off, you will then take the monthly payment that you were applying towards Credit Card A ($25) and power roll it over to Credit Card B to pay that balance ($2000) off next. Now the new power roll monthly payment for paying off Credit Card B is now $75, instead of the previous $50 monthly payment. Next, after getting Credit Card B paid off, you then power roll the monthly payment that you were using to pay off Credit Card B and apply that towards paying off the balance of the medical bill ($5000). Your new monthly power roll payment for paying off the medical bill is now $150 per month (instead of the previous payment of $75).

Now, keep in mind that even though you are applying higher monthly payments to pay off your debts by using this strategy, you want to increase your monthly payments even higher if possible. For example, we now have a new monthly payment of $150 that we are currently applying towards paying off the medical bill. However, if you have the financial means, you would want to increase that monthly payment of $150 even higher if possible. By increasing your monthly payments, the faster you will be able to pay off your debts – not to mention the amount of money you will be saving on finance charges, as indicated earlier. And this means the faster you will get to becoming debt free and achieving financial freedom.

But getting back to using our Power Roll Your Debt strategy, we now have the medical bill paid off. We will now take the monthly payment that we were applying towards the medical bill ($150), and power roll that over to paying off the car. So this means that the new car payment is now $300. Next, after accelerating and/or increasing your monthly car payments, you now have your car paid off. Your next and final debt that you need to tackle is your home mortgage. Since your car is now paid-in-full, you can now power roll that payment and roll it over and apply it towards your mortgage payment. Your new mortgage payment is now $1250. As indicated, this increased monthly payment will accelerate your payoff (paying off your mortgage), and allow you to finally become debt free – since this was the last debt that you had to tackle.

So this now concludes today’s lesson on how to get out of debt – which is one of the primary steps during the wealth building process.

For additional reading I highly recommend that you read the book “The Total Money Makeover” by Dave Ramsey – the best money and finance book in the world. You can purchase the book (which includes a review of the book) at the following web link: The Total Money Makeover

And to learn more on how to build wealth in today’s economy go to the following web link: How to Build Wealth and Retire Early