Friday, May 24th, 2019

Down with DEBT: 7 Steps to Financial Freedom

By Ellen Rohr on Feb 29 2012 • Filed under Money

Down with Debt: 7 Steps to Financial Freedom (photo)Buenos diaz! Yo estoy apprendiendo a hablar Espanol. I attended a presentation by new P&M columnist Ricardo Gonzalez last November. He is a terrific speaker with a pertinent message: The number of Spanish speaking people in the US is growing. If you want to communicate effectively, you are well served to develop your cultural understanding of Spanish speaking people and learn to speak the language.

I was inspired. I have been a little embarrassed that a smart, worldly person like myself doesn’t speak a second language. So, I signed up for the Basic Spanish course at www.bilingualamerica.com I received a workbook, flash cards and a half dozen cd’s, and was introduced, via email, to my tutor, Raelys.

Each week, I progress through the workbook and listen to the cd’s, speakly loudly, “with passion.” Then, once a week, Raelys and I visit on the phone. As I stumble through speaking in this beautiful language, Raelys positively responds to my efforts with, “Perfecto, Ellen.”

And, I am loving it! The hardest part in the process: Following directions. You see, the course is nicely structured and proven to work. IF you follow the directions. Ricardo asks only that you work the program EXACTLY as it is laid out. If you are asked to go through the flash cards ten times, do that. And then sign off that you have done that in the workbook. Easy! Right?

Every time I approach my practice, I want to improvise. I want to NOT follow instructions. I want to rise up and revolt and do things my way. Even though my way has led me to a place in my life where I am 46 years old and not yet speaking Spanish. Why do we fight what we know to be right? It has been a challenge to stay focused. However, I am following directions and reaping the results.

Consistent, disciplined effort wins the race

As a consultant, I encounter resistance to solid advice. “Do THIS,” I suggest, “and you can make more money.” Most of my clients take the advice and the proof is in the pudding. They make more money. They pay down debt. They build wealth. Some don’t. I can relate to the rebels. I, too, hate having to do something…even when I know it is the right thing to do!

One of the biggest challenges I encounter is the suffocating burden of debt. Money buys options. Debt eliminates options. Do you struggle under the mounting pressure of debt…personally and/or in your business? You are not alone. The statistics on debt are troubling:

  • The average American household has 13 payment cards (credit cards, loan payments and store cards.)
  • Americans carry, on average, $8,000 in credit card debt from month-to-month. If you were to make only the minimum monthly payment on that debt, at 18% interest, it would take 25 years to pay off and cost you more than $24,000 in total.
  • 46% of all Americans have less than $10,000 saved for their retirement.
  • 96% of all Americans will retire financially dependent on the government, family or charity.
  • Only 2% of all homes in America are paid for.

I got these statistics from a website offering debt consolidation services. Unfortunately, most folks misunderstand and misuse these services…and get further into debt. These services can be creditors in disguise.

Here’s the good news. You can get out of debt. It’s EASY to do. IF you follow this system EXACTLY.

Step One: Get to a KFP – Known Financial Position

Clean up your business Balance Sheet. Create a personal, family Balance Sheet. Have your Bean Team help you, or give me a call. The section called Liabilities is what you owe; it’s your total debt. Once you know, you can start bringing that number down. I know it’s scary. However, knowing is better than not knowing. You can always improve the situation if you are willing to confront it.

Step Two: Start selling at the right price

Include debt reduction dollars in your Budget. Your customers will have to assume some of the burden of your debt in order for you to create dollars to pay it off. Include in your selling price enough salary to contribute to paying off your personal debt and enough profit to pay down your company debt. Much of the debt I see in my consulting work is a result of hardworking owners trying to get by on too little. If you haven’t charged enough in the past, you may have used debt to just get by.

Step Three: Stop buying stuff on credit

On a recent episode of Saturday Night Live they aired a ‘spoof’ TV commercial for a new debt reduction book called, “Quit Buying Stuff You Can’t Pay For.” It was a one page book with one sentence on the page: Quit buying stuff you can’t pay for.

Step Four: Read The Richest Man in Babylon by George Clason

This slim book uses a story to teach the basics about reducing debt and increasing your wealth. This timeless classic was written during the Depression and offers spot-on advice for today.

Step Five: Talk to your creditors

You may be able to work out a better interest rate or payment schedule. Your creditors don’t want you to declare bankruptcy. Talk to the owner or general manager of your supply house. Work with the credit agents for your store cards. Let them know you have a plan and that you are committed to paying off the balance.

Step Six: Start saving.

A little bit every month adds up. Start with whatever you will commit to…$100 is better than nothing.

Step Seven: Systematically pay down debt.

This is the easy-hard part. It is easy to do it. The problem is it is easier NOT to do it.

The following is based on the great works of John Cummuta. Put together a grid of all your debt. This grid reflects a family’s personal Liabilities. We imagine a family of four, where Mom and Dad own a business and make a combined annual income of $150,000.

Money Grid for Reducing Personal Debt
 
In this example, $6,145 is the monthly DEBT REDUCTION total. That is, the amount required to meet the minimum monthly payments on all seven debts ($4,165)  PLUS $2000 "Accelerator"  to help you pay down the debts. This stays the same every month until all Loans are PAID. (You could do a separate grid for your company debt.)

So, the example family is paying $73,740 per year, or just under half of their income, to reduce their debt. If you have a high debt load like this family, but you earn less, you can reduce the Accelerator (the amount of money you choose to pay that is more than your minimum required debt payments) to make your payments fit your income. The family in our example is paying an Accelerator of $2000 per month. But, if you pay $500 per month instead, you would only need $4645 each month (or $55,740 per year) to pay down your debt.

Note that this debt reduction dollar amount is in addition to the amount that you are systematically putting into savings every month.

Once your debt is paid, you could start putting the entire DEBT REDUCTION dollar amount straight into savings every month. How fast would that stack up for retirement?

You can do this. It’s easy. Muy facil! So, why do we fight what we know is right?

We carry around all kinds of emotional and psychological baggage. Maybe Momma always told you what to do and you are still fighting Momma. Maybe you are in denial about what you really owe. Debt management counselor David Huffman claims, “97% of people don’t know what they owe. No one ever taught them ‘Money 101’ of ‘Debt 101.’ That’s why they are broke and getting deeper and deeper into debt.” Whatever. Get over it and get disciplined. Now you know. Put this system in place today and bring down your DEBT.

Felicitaciones por vivir una vida libre de deuda!


Big take aways are: 

Focus on one bill at a time. Continue to make your minimum payments on all your debts, but apply the Accelerator amount to just one bill at a time. When one bill gets paid off completely, use your Accelerator and the miminum monthly payment you were making on that bill to pay off the next bill,

Go from debt to savings. When you get your bills paid off, continue to pay your Accelerator and minimum monthlies…into your savings plan!


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