There are 3 good ways pay off your debt. My favorite is one I call the Cash Flow method. Look for my new mini-book out soon on Amazon, “The Three Best Ways to Pay Off Your Debt” coming the first of 2019.
This method is the cash flow method. Let’s talk for a minute on why cash flow is so important.
Everything has cash flow. Cash either flows to you or it flows away from you. If you have a business be cautious, the number one reason businesses fail is because of lack of cash. If you are looking at an investment, you should be looking at your return on that investment and that’s more than just a number on a spreadsheet. It’s how much cash will you be able to put in your pocket. You need to know an investment’s cash flow.
Whether or not you have a business or investments, you have a cash flow. You have money coming in. It could be from a salary, from selling things you own, gifts or inheritances. It doesn’t matter whether it’s taxable or whether it’s a gain on a sale. It simply means you have cash in your pocket (or your bank account).
From that cash, you pay for living expenses. You pay rent or a house payment. You pay for food, utilities, clothes, meals out, a million other things. And if you have debt, you well know that a chunk of your cash goes to paying your credit cards, car payments or other debt. In fact, you may feel like you’re drowning in debt.
This method simply looks at one thing – cash flow. Let’s look at a business for a minute. I have had clients who had businesses that made a profit. It was taxable and they had to pay taxes on that income. The problem was they didn’t have any cash. How could that be? How could a business have income but no cash? It’s not just a case of the business owner taking it all out in non-deductible perks. In some cases, it’s just a case of growing a business too fast. For example, you build inventory, hoping for sales. That takes cash but it’s not a deduction. You may gear up for a big job and take on new staff, buy new equipment and then have to wait for the job to pay you. You may have profit from the job, but without cash, you’ll be in debt.
It’s important to watch the profit from your business, and likewise, watch the profit in your life, but without cash flow, your business will have to close down and your life will get really hard fast.
So, with the cash flow method of paying down debt, you’ll focus on just one thing – cash flow. Can you follow another method? Sure. In fact, there are two more methods that are good. I just think this one is better because it recognizes one pure fact.
Cash Flow is King.
Now let’s get that King in your house.
Start by listing the total debt you owe. You need the exact amounts. You may need to call your credit card companies, car loan companies, mortgage lender and others. You want to know the pay off amount.
Write that down in a column.
Next to each amount, write the minimum payment that you need to make.
For example, you may owe the following debt:
Home mortgage $200,000
Honda car loan $ 30,000
Credit Card $ 5,000
And have the following minimum payments:
Home mortgage $2,000
Honda car loan $ 500
Credit card $ 250
Your chart would look like:
Home mortgage $200,000 $2,000
Honda car loan $ 30,000 $ 500
Credit card $ 5,000 $ 250
Now divide the total amount of debt by the minimum payment. Write the answer down in the column next to the amount.
Your chart now looks like:
Home mortgage $200,000 $2,000 100
Honda car loan $ 30,000 $ 500 60
Credit card $ 5,000 $ 250 20
Pay your debt off, focusing on the smallest number first. In this case, it would be first the credit card.
That’s just the order to concentrate on, but there are two more things you need to do:
- You need to free up extra cash. It could mean making more money by starting a side business, selling some thing you don’t need or cutting your living expenses. Eat at home. Skip the lattes. Carpool. Conserve on energy. With every expense, look at how it could be an investment. At least for awhile you’re going to have to cut back on expenses. You need free up some cash to make the work.
- You can’t increase the amount of debt you currently have. Don’t cancel your credit cards, because that hurts your credit rating. Put them out of your reach. Some ideas I’ve heard is to freeze them in a bowl of water in the freezer or put them in your safe deposit box. Make them harder for you to get.
Let’s say that as a result the exercise, you end up freeing up an extra $200 in cash. You could also be making an extra $200. Remember if you’ve created a business, you also just picked up business deductions. If you don’t have a business already, you’ve got write off that may include a cell phone, home office, computer, some car expense, some meals expense…who knows what else you may now be able to write off. That could double the amount you have to apply to paying off debt.
For this example, though, let’s say you have freed up an additional $200. Add that $200 to the minimum payment you make on the credit card. So, you now pay $450. Continue paying that until the credit card is paid off.
Once that is gone, add the $450 to the $500 minimum Honda car payment. Now you’re paying $950 per month toward the car. When the car is paid off, begin making house payments of $2,950 per month.
Of course, once you get going on this, you may discover that you actually have some additional cash you can apply to paying off the debt. That’s great! Increase the payments and get out of debt even faster.
It takes the average person 7 years with this plan to get out of all debt. ALL debt. Your home, your cars, your credit cards. It is the most freeing feeling you’ll ever have.
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