Reduce Debt Increase Wealth

Almost Debt Free Now What

May 28, 2023 MIsterchuck Season 4 Episode 167
Reduce Debt Increase Wealth
Almost Debt Free Now What
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Show Notes Transcript

Getting closer to being debt free now what to do with the money. Tracking and still have a control center is a must. No reason to go back to old spending habits.
Article Link: by Maggie Germano 

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence determination. Almost dead free now we're getting closer to being debt free. Now what to do with the money tracking and still having a control center is a must. No reason to go back to old spending habits. As you pay off your debt, I'm assuming a person has three or four credit cards or not being paid off. Two car payments, a line of credit, and a first mortgage. So as they go through their debt reduction plan, they're focusing on getting rid of the high interest debt first, which in most cases should be the credit cards, maybe they've paid off half of their credit cards. At this time, they should be increasing the emergency fund. So as you pay down your debt, your emergency fund is gonna be growing. So at the beginning, if you had zero emergency fun, you started out by building up to a minimum of $1,000 average time, you've then accumulated up to three to $4,000, you left that$1,000 in there, you applied the access to a debt, and you reduced your credit card debt. And that's maybe been going on for six months, nine months or a year, everybody's gonna be different, everybody's gonna proceed at a different rate. But once you get the first credit card paid off, he should be increasing your emergency fund by $500, meaning you hate by a minimum of $1,500, your savings account never go close, below$1,500. As you pay off the second credit card, increase it by another $500. So now your your emergency fund never goes below $2,000. And you keep this up as your credit card debt is fully paid off. Now you should increase your emergency fund to maybe three to $4,000. Remember, your goal for your emergency fund is having somewhere between three to six months worth of expenses that you pay every month available, somewhat liquid, so that if you something bad happens, you have the money to survive for a while, you're not gonna have to go bankrupt in the first week after being laid off or whatever the case would be, you have money available, that you don't have to sell any investments, you don't have to tap into your retirement fund, you have money available to pay your bills. Now you got to get down to the minimum here. So that until you can get back on your feet, maybe get a new career job, maybe you have to work a part time job, whatever the case is. So that's your long term goal for your emergency fund. But as your debt is coming down, your emergency fund should be increasing. Why? Because if something bad happens, the more money you have available to cover that expense, the less likely you're gonna have to use your credit cards to pay for it. And that's our long term goal here. And your credit cards are gone. Maybe you started out you had two car payments. Now maybe you're down the one car payment, increase your emergency fund, there comes a point when you have say at least $5,000 in your emergency fund. Your local bank that you have your checking account with is probably not paying much interest. So what should you do? Well, you don't want to tie your money up by putting in a certificate of deposit because that's for a set period of time. If an emergency would happen, you'd have to pay a penalty to take it out of that certificate of deposit. You should be looking for either a high yield savings account, or a high yield money market, they act and work exactly the same. They switch back and forth. So you got to keep an eye on it. Generally, this would be a online bank of some sort. That's what I do. The I have right now I have a high yield money market that's paying four and three quarters percent interest, that's a whole lot more than a half percent of interest that my local bank or a my checking account is. So that's what you need to do. You leave some in your local bank, maybe a couple $1,000, you put anything over that into your high yield, investment, or savings or money market account, our goal here is trying to get the money to work for us, is now working for you at a quarter percent and interest that's paid maybe once a quarter. But if it's getting four and a half percent, paid monthly, now you got something working for you. So as you get down, you got no need. So you're down to your first mortgage, a line of credit and a car payment, most likely that car payment loan is a higher rate of interest, you should be focusing on whichever one of those loans has the highest rate of interest. Now, that may be your line of credit. So you need to focus on that. But I'm assuming is the is an automobile loan. And you should also, when you replace an automobile, look for a used car, you look for a used automobile, one to two years, two years, that's gonna be a probably at least two to three years old, because that's when they start coming off leases. And you can save a significant amount of money there, the less you pay for the car, the bigger the down payments gonna be, the less money you have to borrow. So the shorter amount of time is going to take you to pay it off. Again, that's our goal here. But in order to do all this, II gotta continue tracking all your income and your spending on a weekly basis, you got to have your control center set up, and you always got to be viewing it on a weekly or monthly basis and updating it, your utilities gonna go up and down. Depending on what season it is, the more you use electricity and where I live that be in the summertime using air conditioning. And the wintertime I use more natural gas because of heating. So it's gonna change and the the amount you pay is gonna change. So you got to come up with an average. If you're looking for a better way to do things, there is really no better way I have an article on my show notes, what you should do after paying off debt, congratulations, you paid off all your debt. I bet it felt like this day would never come but you stuck to it. You made sacrifices, you reach your goals. But you be wondering what you should do or shouldn't do next. And at this point in time is actually really important, because it could determine whether you stay out of debt, or whether you end up back in debt later. Here are some basics for what to do. One Stop using your credit cards, which you already got in that habit. So as your debt is coming down, you're paying off those credit cards, you still don't use them. If you have another high interest credit card that still has a balance on and you pay it off one of them, you do not close or cancel the car account, you leave the accounts open but you don't use the credit cards, maybe in three months down the road. After you pay that off. They might send you an offer where you can do funds transfer and have 12 to 18 months of zero interest. And if they do, you need to take advantage of that and pay off your highest pay down your highest interest rate credit card. First, by doing a fun transfer. The funds transfer somewhere between three to 5%. But most of the time you'll get your money back within two or three months and then pay that credit card off before that time period expires. As you're doing that you're making a little bit more than a minimum payment because you want to focus on paying down that high interest credit cards first. And but don't forget that that has to be paid off in a certain amount of time. And so that when you get done, if you're really lucky, the higher interest rate credit card is paid down to almost nothing. In this card they used to transfer the fund has a zero balance, and 12 months or 18 months, whatever the case would be. And you want to keep your credit card accounts open because you just paid off your debt and stopped using credit cards doesn't mean you have to close your accounts, the length of your credit history in the credit limit available to you is really helpful to your credit score, they're looking at your income, their credit ratio, the less you use your credit, the higher credit score you're gonna have, because you have a lot of available credit based on your income. So you have a really good ratio. And then lenders love that they love extending you credit, especially if you don't use it, and your reward would be a higher credit score. Sounds weird, but that's the way it works. And your credit score, it's as important when it comes to your future financial decisions like buying a car or a home. So even if you're going to stop using your credit cards, keep the accounts themselves open, so they can help improve your credit score. If you don't want the temptation the cards cut them up or give them to a trusted friend to lock away. They can be open even if they're not available to you. If you're worried about your credit company closing account and hurting your credit set up your credit card to pay for a small reoccurring payments are like a Netflix count, it should be sure to always set up auto pay so you don't forget about it and get charged late fees and interest. This is an easy way to keep your accounts active without actually using them day to day. So what they're saying is, if you're worried about the credit card company closing that account, whatever your be, if you have a subscription that you pay for on a monthly basis, put one of those subscriptions on that card and set up auto pay. That way you get a charge every month and it gets paid off area mob. And you can do that or not. I've never done that personally. But I've never had problems with a credit card company closing an account. I've had a credit card for 20 years. And for the last 15 years, I've probably never made any purchases on it. But yet they keep sending me card every time it expires. And it's a 13% interest rate card, which doesn't matter because I don't ever pay interest. But that's beside the point, it's a good card to revisit your budget, you should revisit your budget every couple of months, I'm saying at least monthly, or to make sure it's still working for you. This is especially important to do when you have a big financial change happen. You can pay increase, decrease a new expense or when you pay off a debt. Now that you've paid off a portion of all your debt, it's a good time to revisit your budget, see how you can adjust things accordingly. As your debts coming down, you're gonna be shifting from paying off those credit cards, they all get paid off, paying off your auto loans, they get all paid off, pay off your line of credit, once that's paid off, whether or not you pay off your mortgage is gone the pan on, what's the rate of interest? How many years you have remaining? What your goals? And is there any tax benefit. Remember, the tax benefit on mortgage interest deduction is not $1 for dollar tax decrease. For every dollar of mortgage you pay interest you pay, you're going to get a percent of that as a tax deduction. So if you're in a, if you're in a 12% tax bracket, you're going getting 12% If you're in a 25% tax bracket, you're only getting 25% You need to talk to your tax advisor to find out it may be is a good thing to keep for as far as your future taxes are concerned. Or maybe because of your goals and what you want to do. Maybe you should start paying it down. Maybe you should refinance it to shorter term. There's all kinds of options out there but before you just decide to pay it off, he got to do your homework and know what's best for you. For me, I was approaching retirement age, I wanted zero debt when I retired. So I paid everything off. If you're in your 30s, in your in a high income, it may be a tax situation there, that's helpful. If it's something that's not a burning on your monthly finances, and as something you can afford, you need to consider all your options. So when you're looking through your budget, after you getting your debt paid down, you need to take out the mount of your pan towards your credit cards, for example, how much your debt payments gonna be, and allocate that somewhere else, ah, savings. So as you increase your emergency fund, and you hit your targets, to where you want that to be, the next thing you need to do is increase your retirement savings. If you have a retirement plan through work, find out what's the maximum amount you can contribute, that the employer will match, you need to do at least that at a minimum. If you want to do more after that, it's up to you. Then another place you put your money as your dad is coming down is investments. Our goal here is get the money to work for us and to build our wealth. And the best way to do that is investments. Investments could be maybe stocks and bonds in the stock market. Investments could be anything that produces an income. Maybe you invest in some type of business, maybe you're investing in some activity that will pay you income in the future. That's all up to you. Rental Property is an activity that doesn't take a whole lot of time but takes an investment. And it will pay for itself and give you some type of tax advantage. Again, if you need to talk to your tax advisor to allocate the money towards your goals. What are your goals, increase your retirement increase the money set aside for your children's college funds or whatever you're setting money aside for increase the money you're setting aside for maybe a second home, or maybe you want that yacht, or that fancy sports car. Now you can start savings for it. So don't go into debt to buy the things you want. You only go into debt to buy the things you need your home and your automobile. Remember, your needs are housing, transportation, and food. Most everything else is a one clothing in there is somewhat of a need. Putting furniture in your house is so much a little bit to a need, but mostly a want if you overdo it. So it's all up to you and what you want to do and your life and your personal finances. I'll be back in one moment with my final thoughts. If you're interested in learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt. And even tells you how much and when to transfer money into your savings account. And how much and when to transfer money to your debt and which debts to pay off in order. First. It's not cheap. It's a one time payment. But it will definitely be an investment something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase And I'll send you the information about this online software that worked great for me as your debt is being paid down. And you're keeping track of all your income and your spending. And perhaps maybe you got a new job and your income went up. So this the good time to go to your control center after you had a couple paychecks and update your income and your control center. Which then you can look at what other expenses may change your gasoline and groceries are different dollar amounts every time you do it. So every month you should go back the last 30 days. Add up all your grocery expenditures and divided by them number that you added together, come up with an average. And if that is higher or lower than the budgeted amount you have, you need to update it. Course, if it's within five or $10, you're probably close enough. And if you're consistent doing everything month in and month out, you should be able to get it within less than five bucks. Same thing with gasoline, go back the last 30 days, add them all up divided by that number and come up with a new average and update your budgeted dollar amount. This is an ongoing process, no matter how much debt you have, you could be 100%, debt free, and you're still doing those two things. Don't stop doing it. Because when you got into debt, what were you doing? Most likely nothing. We weren't tracking your spending you weren't. You didn't have a budget and didn't know what was going on in your life and your personal finance life. He wasn't even sure how much your needs were much less your wants. Most likely, we're spending more money on once and then you didn't have enough money for needs and you're stuck using credit cards. And then you were living paycheck to paycheck, you got to stop doing those things. And you got to keep your life your personal finance life under control. So as your debt is coming down, you should be increasing one your emergency fund first. Once you get 5000 or more build up into our emergency fund, then part of that you can put into a high yield savings, or a high yield money market. As your credit card debt goes away, maybe a car payment goes away, and you're increasing the amount of money you're saving. Because maybe you have goals, maybe you need to buy a new car in the next 12 months. So you got that car payment paid off, that's a plus. But now you need to increase your savings to have a bigger down payment. The next time you go and get a car, I recommend not buying a brand new car but buying a good used car. One that comes off a lease nowadays, the lease is usually three years, you can get one was relatively low miles. Depending on how many miles you drive, which I don't drive a lot. So I can buy a higher mileage car within 12 months to two years is considered a low mileage car, I could probably get rid of it. I never do and upgrade without costing a whole lot of money. So those are the things are going on in your life, you need to start looking as your debt is coming down, your savings are going up, your investments through your report retirement plan should go up, you should be least making the minimum contribution that your employer will match. So if your employer matches 3%, you need to be putting in 3%. If your employer matches 10%, you need to be putting in 10%. It cannot save too much for retirement. Have you ever heard anybody say I have too much money saved for retirement, I don't know what to do. Most likely not. Because if you have too much money and you don't need it, you can then give money to your favorite charitable organization, you can help out others who are in need. So don't forget, you need to stay focused. You never stop tracking your spending and your income and you never stop taking care of your budget or your control center. That's gonna be the rest of your life. As long as you are paying bills, you will be doing those type of things. Once you have your emergency fund and got your 401 K, maxed out at work. You have your emergency fund of let's say four to six months worth of your expenses may be a little bit more. Now what are you gonna do? Now you need to put your money to work for you. The most common and easiest thing to do is in the invest in the stock market. And you might need some help a financial planner can help you. So look for a financial planner, that's a fiduciary. That means that they look out for your best interest, their income, or fees are based on the amount of money you have invested, not on commissions on what they sell you or what items they sell for you, or items they purchase for you. They're not a commission base of buy, most of them will want you to have a minimum amount before they will start take you on as a client. So you need to call around and see who's willing to take you on column, you don't know anything about investing, investing in the stock market, this will stay in that for now. You need to spread your money around among industries, and they have the stock market that different companies are divided up by industry, they're divided up by other ways also. So you need to invest a little bit everywhere. So you're diversify, you need to diversify all your investments. So if one segment goes down, another segment goes up, you're not going to get killed. If you're in the wrong segment or industry. That's the basic minimum of knowing, I always invested in mutual funds because their mutual fund is investing in a market segment or industry. And then they diversify within that industry. And I don't have to do that. You don't put all your money into one company. So if you want to go in the automobile industry for say, you don't put all your money in General Motors, you got to divide it out and spread it around. So if one does better than the other, you run an event out. Same way with retail, all industries are like that. So you need to spread your money around within industry and then within segments and within the whole nine yards. The more balanced your portfolio is, the better off you're gonna be. You may not have as large gains, but you're definitely are not gonna have any big losses. Over time the market is gradually going up, while the day the day may be up one day down the next up and down, up and down, up and down. Over time the market generally is going up. If you look at the market valuation back in 19, a 2000 for say, it's gonna be much higher in 2020. Over time, it's going up and 2008 It dropped, but it's recovered and kept going up. It's a long, slow process. So the sooner you get money invested, the longer you can keep it invested, the more you're gonna have and that's why you invest money in the stock market for your retirement. And you'll be glad you did so