Become Financially Independent By Paying Off Debt And Investing The Savings
You can pay off $36,000-$60,000 in consumer debt within three to five years. The vicious cycle of paying minimum payments and making your income stretch to the end of the month can end using the snowball method or the Shred Method.
Keys to winning financial independence and gaining freedom to live your dream life debt free.
- Know your financial traits. Are you an offensive spender or a defensive saver?
- Make your debts visible and your debt-free date memorable. See them daily to make an impact on your financial motivation and self-discipline
- Understand the two types of debt and how they make you financially stable or unstable. Good debt adds income as financial investments, and bad debt consumes your income as expenses.
- Put the debt snowball and Shred Methods to work. Be diligent in sticking with the programs, even during the lean times. Your financial success timeline is dependent on your financial discipline.
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Win The Financial Independence Game With Offense And Defense Strategies
Just like playing NBA basketball, you can’t wait till the fourth quarter to begin playing defense. Our society plays offense for three-quarters of their financial lives, then starts playing defense in the last quarter of their life because they discover they don’t have enough saved and need to minimize expenses to have a pleasant retirement.
Couples and accountability partners can each play the role of the offensive financial spender or defensive saver. Learn your spending and saving habits and assign roles based on your financial traits.
Support and hold each other accountable for each position on your financial team. Then discover if you have a liquidity or income problem and let the Financial Freedom Game begin.
Make Your Debt Visible And Your Debt Free Date Memorable
Experts suggest making your debt visible. Do not lock your debt away in an electronic application or spreadsheet. These debt-reduction tools are helpful in their own right but cannot make your debt part of your daily activities.
Instead, handwrite, not type, two lists of your debts in the least to the greatest amount owed, then place each list on your refrigerator and bathroom mirror.
Every time you want to raid the fridge for a drink or make a meal, you will see your progress and be encouraged to continue your debt-free journey. While standing in front of the mirror to brush your teeth, you are prompted to think of more ways to reach your debt-free date sooner.
Celebrate wins by crossing out paid-off debt with a red marker and enjoy your reward. Then, get back to work to become debt free by your expected debt-free date or sooner.
The goal is to keep your debt front and center of your attention. See It, Say It, Write It, and It Will Come True. Placing your debt-free lists in places you see daily or more often helps you stay on track through encouragement and discipline.
Using your payoff date as part of your passwords is another method to keep your payoff date goal at the forefront of your thoughts. Password encouragements feed the mind repetitions of goals, reminders, and positive self-talk. Typing in your password multiple times a day reinforces what you believe is important and is possible to accomplish.
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Types Of Debt And How They Make You Financially Stable Or Unstable
The consumers of society have been conditioned by bankers, advertisers, and life’s mishaps to believe that going into debt is natural, expected, and good. The trappings of wealth and the “microwave” logic of “I need it now!” has led our society to believe the myth that having delayed gratification is bad and debt is good.
Lenders and Commercial Advertising promote consumer debt to make money on your purchases and the interest that accrues with financing products and services we cannot afford outright.
Life mishaps, such as reduced income, divorce, unemployment, addictions, and medical expenses, happen and require a “rainy day” fund to keep us debt free. Unfortunately, poor money management is the root of many debts acquired from life mishaps.
Bad Debt Is An Expense That Consumes Your Income
You cannot become Successfully Unemployed if you have bad debt.
First, you have to decide if you are ready to resist gaining new bad debt. Trying to pay off debt is pointless when adding more bad debt to your expenses. This mentality is called a liquidity problem.
Credit Cards – High annual percentage rate (APR) is the main reason to not borrow on credit cards. Credit cards promote the “I need it now” mentality that puts many consumers in overwhelming bad debt, although most purchases made on credit cards are not essential or life-threatening.
Car Loans – Opportunity costs and interest rates are the largest disadvantages of going into debt with a car loan. Automobiles decrease in value before you leave the dealership, and many consumers want or need another vehicle before they pay off their car loan.
Personal Loans – Personal Loans are unsecured installment loans that are approved based on your credit score. The larger the loan amount, the higher your credit score needs to be. Interest rates are fixed, and repayment terms can range from one to ten years, based on the loan amount.
Good Debt Is An Investment In Your Future And Increases Your Income
Student Loan – Student loans are considered good debt because they are an investment in the student’s future by providing higher earning potential.
Some finance experts say that student loans are bad debt because about 48 million borrowers owe $1.7 trillion in student loans, usually taking 10+ years to pay off. Interest rates are lower than most loan rates, but you still need to pay your student loan debt off as soon as possible.
Mortgage – Real Estate investments are in a relatively low-risk market; thus, for the most part, an owner can sell the property at a higher value than their mortgage loan. Home equity line of credit is another reason mortgages are considered good debt.
Two Methods That Help You Break The Debt Barrier Of Financial Security
Avoid using a “flashlight” instead of a “blowtorch” to eliminate your financial debt.
Example: A consumer receives a $300 bonus on a paycheck. The consumer would pay an extra $50 on six different debts using the “flashlight” method. The “blowtorch” method works like the snowball and Shred Methods by putting the whole $300 on the smallest debt to help pay it off sooner and continue to pay the minimum payment on the other five debts.
Snowball Method – Watch Your Debt Melt Away!
The snowball method is simple and only takes a few minutes to set up. The most challenging part is finding extra income to pay down the first debt faster because once the snowball begins rolling, it is not long before it barely needs any help.
How To Set Up The Snowball Method
Handwrite all your debts except for your mortgage, from the smallest to the largest amount owed. List the highest interest debt first if there are debts with the same amount. This is the list you will put on your refrigerator and bathroom mirror.
Your list should include the following:
- Name of creditor – This is the lender from whom you borrowed the money.
- Current amount owed – Write this amount in pencil because it will change as you pay down your debt. The revised amount should always be lower.
- Minimum payment amount – Pay this amount on all debts except the “snowball” debt.
- Interest rate and how the interest rate will be charged – Pay the debt before the interest charged increases.
- Individual debt pay-off reward – We all need small goals to motivate us to continue. This reward can be a special purchase (not charged) or something non-monetary.
- Expected debt-free date – Write this date in pencil too! Only change this date if it is sooner than expected. Remember, pay the debt off as soon as possible.
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How The Debt Snowball Works To Pay Down Your Debt To Zero.
Once your list is created, determine how many months it will take to pay off the smallest debt. This is done by dividing the minimum payment amount into the total balance owed on that debt. The answer could be weeks, months, or years, depending on how large the debt is.
Paying off the first debt is the hardest part of the debt snowball. Like building a snowman, the first ball is the most difficult to roll. You are only paying the minimum due on all other debts while finding every source of income and savings to pay extra on this first debt.
This means giving up everything that is not a need, such as housing, utilities, transportation, and necessities. Your goal is to decrease the months it will take to pay off this first debt.
After the smallest debt is paid off and your celebration is over, cross out the paid debt on your list, preferably in red. You are now ready to add the amount you were paying on the previous debt to the next smallest debt.
Repeat the process until your mortgage is the only debt left to pay. You know the drill. Snowball your final minimum payment into your mortgage until it is paid off. All bad consumer debt should be paid off within three-to-five years if you work the snowball method correctly.
Good consumer debt, like student loans and mortgages, will take longer to pay off because their balances are very high. Just keep working the snowball process, and they will be paid off before their original payoff date.
Shred Method – Utilize Your Good Debt To Pay Down Your Bad Debt
The Shred Method uses an educational platform software to help consumers use the interest rate arbitrage to help people pay less in interest on their mortgage, car loans, credit cards, and student loans.
Adam Carroll created the Shred Method to use the bank’s money against itself by using a lending tool to borrow in short bursts but pay back rapidly. The borrowing time frame is between 10 and 45 days.
This two-way street where the money goes in and comes out by borrowing small amounts against your home equity line of credit differs from the one-way street of paying your mortgage each month. Mortgage payments only go in but do not come back out again.
The difference is utilizing the equity in your home during that timeframe to pay your debts instead of allowing the bank to use it for their gain. The interest you spend on the borrowed money is negligible compared to the amount you save by paying your debt down, saving even more interest in the long run.
Mortgages are created for the bank. Mortgage lenders often encourage homeowners to refinance every five to eight years to restart the debt clock because they make most of their money on a mortgage loan within the first ten years. This is because the consumer pays more interest in the beginning than toward the end of a mortgage loan.
The interest is calculated differently for the mortgage and home equity line of credit loans. A mortgage loan is a compound interest vehicle. The interest on a mortgage is charged based on the total balance of your mortgage on the last day of the previous month.
The HELOC loan is a simple-interest vehicle. The amount of interest you pay is calculated based on the average daily balance of the loan.
The Purpose Of The Shred Method And How It Benefits Your Long-Term Financial Security
This debt reduction plan only works if you are financially disciplined to spend less.
You cannot have a spending problem or more months at the end of your money. You can’t borrow your way out of a spending problem, but you can borrow your way out of debt you are no longer building.
The Shred Method teaches you how to leverage your home equity line of credit as a checking account to pump your money through on a weekly or monthly basis.
The software uses algorithms to tell you how much money to use from the HELOC account to pay various debts.
At this point, the Shred Method utilizes the snowball effect to eliminate as many debts as possible.
The Snowball Method is great for small debt that can be paid off quickly because their outstanding balances are low.
The Shred Method is great for large debts, like car loans, student loans, and mortgages. Both methods aim to help consumers become debt free and financially stable for the rest of their lives.
Other Recommended Resources To Help You Start Your Financial Independence Journey
Debt-FREE & Prosperous Living Basic Course by John Cummuta
Rich Dad Poor Dad By Robert Kiyosaki
Mastery of Money by Adam Carroll
The Build A Bigger Life Manifesto by Adam Carroll
Winning The Money Game by Adam Carroll and Chad Carden
30 Days To $1K by Adam Carroll
Meet Financial Literacy Expert Adam Carroll
Adam Carroll is the founder of the Shred Method. He is also the host of the Build A Bigger Life Podcast and the curator of Mastery Of Money.
You can contact Adam Carroll at adam@adamcarroll.info or find him on Instagram at @adam.carroll.