Before you start a business you need to get your personal and financial life in order. You won’t have time after you go into business as it will initially take all your attention to get the business underway.
Last week I left you to do a little planning……
- First figuring out what kind of life you want
- Second working out a budget to match that lifestyle
- Third totting up all those debts that stifle your freedom
As a result, you should now have a list for every family member of what they need to be happy, both material and intangible things.
You should also have a budget worked out in terms of how much money you need to achieve your chosen lifestyle. This should be expressed as monthly income. Each family member should be aware of how their needs affect the budget, especially the kids. This is good education for them as it teaches them the value of money.
Finally, those stifling debts. Had you realised just how much they came to, or were you pleasantly surprised?
This week we’re going to start with those debts and use our three step approach to get rid of them. In order to achieve financial freedom, you must eliminate debt. You won’t believe just how great it feels to be debt free until you achieve it!
Let’s look at some possible areas of debt and get a kind of priority list for elimination:
Mortgage – most people have one and believe it should take 20 to 30 years to pay off – nonsense, it’s the lenders who want you to believe that. The difference in monthly repayments between a 20 and a 25 year mortgage is marginal – even between a 15 and a 20 year mortgage the difference in payments is relatively small.
Car loan – most people go for 3 year loans but they can be up to five years. Again, because you pay such a huge amount of interest on the longer term loan, there is only a small difference in monthly payments.
Credit cards and store cards – these are the biggest killers as the interest rates can be extortionate. They also encourage you to make small payments and keep spending – that way all you ever pay them is interest, you never pay off any of the actual loan. In fact it usually just keeps on getting bigger!
Step one – take your list of debts and write alongside each one the rate of interest. If you don’t know, find out NOW! You should already have the amount outstanding written down.
Now re-list the debts in order with the highest interest rate at the top of the list and the lowest rate at the bottom. This is the order in which you are going to clear your debts.
Step two – add up your total current monthly payments on all your debts.
Next for each debt except the first, note alongside the lowest monthly payment needed to keep the lender happy. Add these up and take the total away from your current monthly repayment total. Unless you are in really dire straits, this should leave a surplus. For example – let’s say you are currently paying 400 a month and your list of lowest monthly payments totals 300, this means that you have 100 a month to pay off the debt at the top of the list. What we have done is to target as much as possible to pay off the highest interest debt.
Step three – return to your monthly income budget and add ten percent (if you don’t think you can earn an additional 10 percent then see if you can find that amount by some small budget cuts here and there). You are going to use this 10 percent to really accelerate your debt repayment.
Apply this extra ten percent to paying off the debt at the top of the list – don’t worry about the others. As long as you make the minimum payment on each, they will soon take their turn at priority clearance.
As each debt is paid off, apply the monthly amount you were paying towards the next one on the list – in addition to what you are already paying towards that one. As each debt is cleared the amount going to pay off the next one gets bigger and bigger and because you get rid of the highest interest ones first, the rest start to come down very rapidly.
One important point though …… STOP BORROWING!! If you keep borrowing, the situation gets worse rather than better. Stick to your budget – that’s what it’s there for!
Keep steadfastly to this regime and you will be amazed how quickly your debts disappear.
Next week we will return to the more positive aspects of achieving your chosen lifestyle. Until then…
Have a great week
John
