Dump the debt! The smartest investment you can make.

“Limited time only, buy now for best rate!”
“Lowest prices of the year!”
“3-day sale, get’em while they last!”

You’ve probably heard all of these lines and more by clever marketing gurus on the radio and television during the past week. We are bombarded with offers to buy stuff every day. In a nation that promotes having everything you want and need “right now”, and whose government spends more than it makes at an incomprehensible rate, it isn’t difficult to believe that many people are following suit. The 2006 US Census report shows that American’s have roughly $2.4 trillion dollars worth of consumer debt (credit card, store cards) alone. This figure doesn’t even take into account loans (debt) for cars, boats, student loans, homes and the like. That $2.4 trillion works out to be nearly $8,000 in debt for every man, woman and child that lives here in the US. And seeing how children are typically not running up $8,000 credit card bills, the total is closer to $12,000–$18,000 per household. It is believed that the average household actually averages $50,000-$70,000 in debt plus a home mortgage! According to that same 2006 US Census report, the average household income is only about $42,000.00 annually. Could you say we have a debt crisis?

Debt is the largest financial trap for people by a landslide. Debt is responsible for more restless nights, stress related illnesses, depression and fear, and divorces than all other money issues combined. Debt is a major factor in our decision making process. Debt dictates a vast majority of our life and almost always in a negative way. Debt has become such a way of life for people that most can not conceive of purchasing a car without a payment. A car repair is almost always paid for with the credit card verses a check or cash. It is even rarer to go out to eat at a restaurant with cash enough to pay for the meal unless its fast food and even that is starting to change for the worse. What’s wrong with this picture? Isn’t it time for a change? If you disagree that debt is a trap and you can “manage it” just fine, then save some time and quit reading this post. For everyone else that is ready to break out of the normal lifestyle that is addicted to debt and pursue a debt-free life, please continue reading.

The greatest investment you can make for your financial future is to resolve to stop the debt accumulation and begin eliminating your debt today. Breaking out of a debt filled lifestyle will be one of the most difficult journeys you may face, but achieving a debt-free life will be one of the most rewarding financial and personal victories in your life! The rewards won’t be limited to you, but will dramatically impact your family and friends for the remainder of your life and beyond. If you are ready to start eliminating your debt I have provided a simple method showing where to start and what debts to tackle first.

Dave Ramsey calls this method Baby Steps. And while there are a handful of possible methods and perspectives, I would align myself closer to the Baby Steps method than any other simply because it works!

Start an Emergency Fund – $1,000 set aside before anything else!
Emergencies are not more clothes, a date night, or a getaway vacation. These funds are for real emergencies like car trouble, unforeseen home damage, medical issues and the like. Once you save the money put it somewhere that is liquid (no stocks or CD’s) like a saving account. But don’t touch it!

Pay Off Debt – Pay minimums on every debt except the one with the smallest balance.
Despite what many “financial scholars” may teach about paying off the debt(s) with the highest interest rate(s) first, it’s not the best path. If you remember what we discussed in an earlier post, over 80% of our financial problems are behavior problems, and only 20% head knowledge. Paying the smallest balance first will cause you to see progress more quickly, which computes in our brain as a victory and success financially. The more successful decisions we make financially the less we will tend to revert to poor financial behavior patterns. The only exception I would consider in this stage is if you have a debt with a 0% interest rate for the ENTIRE loan term (0% on all 60 months of an auto loan). Once all debts are paid for in full…quit creating debt by using credit! Use cash, checks, and your debit card. Save your money for next car or vacation. It will feel a lot better knowing the thing you do and use are paid for in full.

Complete the Emergency Fund – Save an amount equal to 6 months living expenses, typically $14,000-$18,000.
A solid emergency fund will help protect you when those unexpected expenses come your way. When the engine or transmission in your vehicle dies, you won’t have to swipe the plastic to get it fixed. When an injury or job layoff occurs, you will have time to find new work without going into the red. If you experience a real emergency and you use these funds, get the balance back up to a full 6-months worth of expenses before any more savings or other investments.

Time to Invest – 15% of your monthly household income is being placed in investments producing a minimum of 10% annual return.

There are numerous methods for investing, but we’ll stop here. Focusing on debt is the critical component to living a successful financial life. Whatever it takes to get your debts paid off make it happen. If you are serious about getting out of debt ASAP then dump the debt and the pride! Pride is a real obstacle in debt elimination. Pride keeps us from selling a car we really can’t afford for a paid for 10 year old used car that has a lot of life left (without any debt). Pride keeps us eating out at the restaurants with friends when we know it’s blowing our food budget. Pride causes us to try and keep an image of “we’ve got it going on financially” even though we struggle to pay the utilities bills on time. If you want to win financially you have to be more concerned about where you will be 30-years down the road than what you will be driving the down the road. Start dumping your debt today.