Reduce Debt Increase Wealth

Debt Reduction Plan Budget

July 09, 2023 MIsterchuck Season 4 Episode 173
Reduce Debt Increase Wealth
Debt Reduction Plan Budget
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Show Notes Transcript

Having problems reducing debt, this is how to get started on that process.  Going to expand on the allocation money in the control center. (Budget). 

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination debt reduction plan, having problems reducing debt, this is how to get started on that process. Later in this episode, I'm going to expand on the allocation money in the control center, the new column I came up with, I've been thinking about that. I talked about it in the last episode. And I've been thinking about it. So I'm going to come up with more comments on how to handle that. And your spreadsheet, I got this idea from you need a budget, the app called you need a budget or yn A B, I watched the YouTube videos, and they have really good training. And if you're having trouble creating a budget, it's a little bit expensive, about$15 a month, unless you pay a yearly subscription of $99 a year. And it focuses on budget, it's all set up to make the budgeting process easier. So I'm gonna explain some of how they do that. And how we can incorporate that in our own control center that we're doing on a spreadsheet, not all of us have the money to pay $15 A month when you're trying to get out of debt. So we can try to figure out how to do it ourselves using a spreadsheet, similar to what third known, we can save some money and still get the benefit of that particular type of process. But if you're having a debt problem, the first thing you have to do is identify all your debt that you have. So if you know you're struggling, perhaps you're living paycheck to paycheck, perhaps you never seem to have enough money to pay for things that are due when they become due. Most likely, if I explain anything, that is your scenario, or close to it, you most likely have too much debt based on the amount of money you have coming in, because you're using all your money to make those monthly payments. And that doesn't leave you enough money to live or to buy groceries, pay for gas in the car, emergency whatever. So you need to have a plan. And the first thing you have to do is identify all your debt. I called it episode a couple episodes ago, tracking your debt. And it's just a matter of getting together all the statements, you get all your credit card statements, all your loan statements, get it all together, and we want to sort it by type of debt. Put all your credit cards together. If you have a mortgage and a line of credit on your home, put those together. If you have car payments, put those together. You want to keep track of the name, who you owe the outstanding balance, the minimum payment, and the due date. That's what and the interest rate. Those are the five things you need to know who you owe outstanding balance, minimum payment, the due date when the payment is due in the interest. Once you know that, maybe you can record it on a spreadsheet, then you'll be able to sort it by alphabetical order by credit cards may be the credit card sorted by the highest interest rate first to the lowest interest rate, whatever you want to do, and then your mortgage loans, and then your car loans. And the reason you want to do that is you need to one identify what really your debt is you need to come to the realization of what you owe. A lot of people just go into debt and they don't keep track of it. And I have no idea until they're short of money and then it's too late. I kind of blame that on the lenders, because the lenders keep lending the money and the lenders know what all the other debt is because they do a background check on your credit. So they have a good idea of what your debt is unless you did something that same day. And you're got a whole bunch of debt and one day they probably know about it. And that's why you're probably struggling and borrowing money. If you're going to a payday loan, and getting cash advance on your next paycheck, you're in trouble. And you got to stop doing that, because those are high interest rate for this amount of time that you're borrowing the money for. So that's step one, get everything identified and get it in some type of order. So you know what your debt would be. The next step is having a debt reduction plan. Plan that helps you stay on track and focus of what you're going to do in order to pay down and pay off all this debt you have. So the first part of the debt reduction plan, quit using credit, quit borrowing money, period, that's the key. If you keep borrow money, how you gonna pay it off, if you pay$1,000 This month, but you borrowed $900 On that same credit card, a un reduced your balance $100. So quit using credit, number one. Number two, make the minimum payment on all your debt, I have a reason for this, you Hill hear people say, you're not gonna get out of debt, if you make the minimum payment. Well, that's true. But we have a plan. And the plan now calls for making the minimum payment. And stick with me, and you'll understand why I'm saying that, number three, start an emergency fund, if you don't have an a savings account, with a minimum of $1,000 in it, you need to do that first, before you start trying to pay off any debt, you have to establish an emergency fund, and you need to have a minimum of $1,000. Why? Because what's number one, quit using credit. So if we're going to quit using credit, and an unforeseen, unexpected event happens, such as an injury, or a breakdown of some sort, you're gonna need some money to pay for it. And if you're not using credit, you need to have the cash. So you keep a stash in your savings account. At this point, you don't need to identify what use is gonna be for, you're not going to use it to pay to go out to dinner period, you're not going to use it to pay some of your monthly bills, period, at ser for some unexpected expense, that may happens sometime in the future. For now, that's all you need to do. And the reason is, so you cannot borrow money, so you can quit using credit. Number four, is once you have a minimum of$1,000 in your checking or savings account, then you continuing build that up until you have three to $4,000 in there. Why? Because we want to build it up, the longer it takes, the longer time you have with an emergency fund. And as it grows, you'll have a little bit more every month or every pay or whatever the case is, it'll get bigger and bigger and bigger until you get to the point where you have somewhere between three to $4,000. At that point, you need to look at all your bills. Are everything being paid timely. Is everything caught up? Am I behind on anything, if you can say I'm in good shape, I gotta have money coming in. I got money, enough money coming in to pay my expenses coming up. I can use this money. So you would take the excess over the$1,000 and apply it to one of your debt. Now which debt are you going to apply it to? You have options. The first option is the snowball method, where you pay off the lowest balance first so that you look like you're getting traction. And then once the lowest bounce once paid off, then the next lowest one and so on and so forth until you're debt free, but that may cause you to pay more in interest to Avalanche method would be to pay off the highest interest rate first, which generally speaking gonna be your credit cards. Now you can pay off the highest interest rate one first that has the lowest balance that might work or, but in reality, they have an Avalanche Method is only looking at the interest rate, and paying off the highest interest bearing credit you have. And then working your way down from there, I like to do kind of a mix of that, for the very first debt that you're trying to pay down, it should be the one with the lowest balance and it should be a credit card, I have a reason for that, say you have three credit cards, and they ought to have more than $5,000 balance on them every month. And it's been like that for years. And you have one credit card that may have a $1,500 balance, or a $2,000 balance that you can't seem never pay off that one with the lowest balance is the one you should pay off first. And the reason is you pay it off first, you don't cancel it, you don't do away with it, you keep it because if you close that account, it will hurt your credit score. So you want to keep it open, so you have more available credit that makes your credit score looks better. So over time, you're improving your credit score. The second reason you keep it open is three months or six months down the road, that credit card company, my mail you an offer, where you can transfer a balance from another credit card for say, 3% fee or a 5% fee on the transfer, but get 12 months 18 months worth of no interest. So you could take a balance off a high credit card where you're paying 20% interest, say take three or 4000 off of it, put it on this card during a transfer, pay no interest for a year, pay it off within a year, and you just reduced your interest that you're paying, because you reduced the balance on a high interest card. So you can use that to your advantage. You pay it off again, it comes to zero, you pay down through other credit cards, you made a significant increase on a high interest credit card. So over time, your credit score is looking better and better. And that's what you do. Never close a credit card. If you have really bad credit and you're really overextended, when you pay off a credit card, that bank may cancel it. But there's nothing you can do about it, just keep moving forward, so that they close out a credit card for you. Because of your bad credit, there is nothing you can do about it over time, your credit score will improve, it's just gonna take a little bit longer. Once you start, then apply you do you start all over, you build up your savings account again until you have three to 4000 in there, I would prefer more the better. Get it closer to 4000 before you apply it. Because the longer you have money in your savings account, the more you have the bigger emergency if something would pop up, you can cover without borrowing money for credit. I have a link in my show notes for this article from Creating a debt reduction strategy. And I just gave you your your debt reduction strategy. So let's see what they have to say. If you have a significant amount of debt, whether from credit cards or mortgage, auto loans, student loans or otherwise, chances are he thought about the best ways to reduce what you owe. Maybe your debt has strained your credit scores and you need to work on improving them. Maybe you'd like to enhance your credit history before applying for a mortgage or borrowing money for a child's education. Whatever your reason for paying down that success starts with understanding your current financial situation and building a strategy to follow moving forward. Understanding your current financial situation is identify what all your debt is. That's step one. That's what they're telling you. What's their strategy moving forward as your debt reduction plant, quit using credit, make the minimum payment, build an emergency fund once you have a minimum of$1,000 Anything over that once you got three to 4000 build up applied excess over 1000 to some debt and apply it to whichever one you choose. And then repeat. That's your strategy. how much debt you have is what what kind is it, the amount you owe and the type of debt you carry would have an impact on your credit scores and credit reports. From the three nationwide consumer reporting agencies, which are Equifax, Experian, and TransUnion debt is typically divided into good debt and bad debt. Historically, debt associated with a mortgage a business or student loans, I'd be considered good debt. Because the money you spend on your housing, livelihood or education comes with the expectation that you're improving your financial outlook. Your home for example, we're likely appreciate in value over time, a good education will give you the skills needed to move up the corporate ladder, thereby increasing your earnings potential may be bad debt, on the other hand, is generally consider any debt associated with purchases that will improve your long term value. This includes obvious items, such as credit cards, personal loans, payday loans, can also include your car loan, since new cars generally depreciate upon purchase. That's why I recommend do not buy any new car while you're trying to pay off your debt. If you need to replace your car, buy a used one and you'll save a bunch of money. When setting up repayment plan, take stock of all your debt, calculate the total and separate separate them into goods versus bad. I don't know what the point of that would be. Also pay attention to the interest rate on eight existing line of credit. It's a good practice to pay off bad debts with high interest rate first, because the creditors are less less skeptical of good debt remaining on your credit reports. Of course, you still need to make on time payments towards the good kinds of debt. But a mortgage that allows you to write off your interest payments at tax time is not as detrimental to your overall credit health as say a balance on a high interest credit card, I say you need to focus on your credit cards first, pay off the one with the smallest balance and then after that, apply it pay them off by the highest interest rate. And then once you got your credit cards paid off, then you got to look at car loans. Then once you got car loans, while you always gonna have your student loans. That's debatable what you should do there. I don't recommend refinancing then refinancing student loans, leave it with the original lender, just in case something happens at the federal level concerning student loans. That's all I have to say. And then your mortgage would be last because one it could be helped you on your taxes and two, if you recently got a mortgage, you got a low rate of interest, and the mortgage rates have gone up. So it's probably better to keep the the lower interest rate one short term strategies when you're taking stock of the debt you have and how they reviewed by lenders she can start to formulate ways to pay down why you begin the process by making a budget and committing to living within your means. If for example, your monthly income is 3000 Make sure your expenses are Clooney, what you used to pay down your debt are less than that. Now you can decide which debt you want to tackle. First, if you're looking for easy morale boost, you can start with a debt you can eliminate quickly sets a credit card with a low balance or remainder of a small loan. Crossing a debt off your list can build your confidence and help the overall effort to gain momentum. This strategy is commonly known as a snowball method. Another approach is to list your debt according to interest rate, highest to lowest and start at the top of the list. That's often called the Avalanche Method. by tackling your high interest at first you will eliminate the ones that cost you the most each month long term strategies when reducing debt and rebuilding a damage done to your credit scores long term strategies are equally important. This is what the debt consolidation, debt management plans Advisory Service and other third party assistance can come in handy. Do your own debt reduction plan, follow my plan and you will be successful. No you have to do a few things. They're not talking about the budget. They don't even talk about how to do a budget that is say do a budget live within your means. Well that's easier said than done and how you gonna do that. And that's why I'm talking about my advanced budgeting techniques, items that I covered in the last episode a week ago. If you had, if this is your first episode you listen to you need to go back two or three episodes, and listen to what I've talked about and get up to speed. Before listening to the rest of this episode. I call it a control center. And if you're going to tackle your debt reduction plan, you have to get control of your personal finances. And you do that by one, tracking all your income, all your expenses, you can get an app to do that. The app I use is count, it's $9.95 a year, I manually do all the input, which you should mainly input all that transactions. And that helps you say focus that helps you understand where the problems may lie. But tracking is hindsight. It's what happened in the past, there's nothing you can do at this point to change that outcome. To control center, which most people call a budget is where you take control of your finances. It's where you can look ahead, know what's coming up, have money set aside to pay those bills coming up. So you make all your bills on a timely basis, and you reduce the amount of penalties and interest that you have to pay. If you find this podcast helpful, you can make a contribution by going to my footnotes and clicking on a subscription page. Or you can go to reduce debt, increase and click on the support button. I like to thank all those who may contributions to help keep this podcast going. 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 reduced debt increase And I'll send you the information about this online software that worked great for me. And pass episodes I talk about creating a budget and how you set it up. If you're using a spreadsheet, which is what I talk about, you have column a description, I'm going left to right, I'm not going to name the columns. The next column is your budgeted amount. The next column is the actual amount you actually spent that month. The next column is the difference. The column after that is percentages, notes. But as I was doing my research a week ago, I came across a different concept that what I just explain is your traditional budget, where you figure out how much money you need by category. And then that's what you budget for. And then when you actually make the payment of those items. That's when you enter and the actual amount. When you receive your income. That's when you enter your paycheck amount. So that your actual is an ongoing target of what's going on in your finances for the month. But there's one thing additional you can do to make the budget forward looking even more and that's the addict Column allocated money, that's money, you allocate it to pay a certain expense, I would put it description, budgeted amount, allocated amount, actual amount. difference, the difference is between your budget and your actual has nothing to do with the allocated percentage percentage is same thing has nothing to do with what you allocated. And then your notes, the allocate it with money you set aside for that particular category or that particular item to make a payment, sometime in the near future. So, when you're doing your spreadsheet, and order to keep track of all this on your income, you need to add a row or line, call it allocate it monies from previous month. Why? If you just start, if you're looking at the end of a month, and you get a paycheck, maybe all your expenses have been paid for that particular month. So you have this paycheck, what are you going to do with it, you're not going to put 100% of it into savings, hopefully, you're not going to spend 100% of it, you're gone to set aside some of that to make some payments in the future, the next month. So for as we're close to end of the month, you get a paycheck, you might allocate some of that paycheck for rent, utilities, groceries, gasoline, whatever, then the end of the month comes, you'd never use that money, meaning you never paid or bought anything in those categories. So we need the brain that allocated money for from the previous month into the current month. And the only way to do that is bring the allocated money from your income, the posits made in your checking account that's already been allocated, but not spent over into the current month. And then you can bring those dollar amounts from those categories, and to the current month. So let's start at the beginning of month. Let's say you have monies allocated for rent and utilities. So let's keep it simple, you get a paycheck towards the end of a month, or even the current month, let's keep it even more simple. The current month, the first month you get a paycheck, you allocate the money towards rent utilities, your rents due on the fifth, you have enough to cover it. So when you pay your rent, is when you put the actual dollar amount of the rent that you pay into the actual column, when you do that, the allocated column is reduced by the amount of the rent you pay. I'm saying it that way, because you may allocate more than one month's rent. So you only paid one month's rent, you might have some excess that's gonna stay there, or it might go to zero. So that's first head up, then you get another paycheck and you allocate that to your car payment, rest of you utilities, some groceries, and some ones I never talked about once, and we're going to cover that here in a minute. And you allocate that once the money is deposited in your checking account, that's the amount of money you have to allocate to these different categories. Once you make the payment, whatever the payment is, you're subtracting that from the allocated category at the end of the month. If there's any remaining monies in the allocated accounts, you got to bring that forward to the next month. And the same dollar amount from the income side of it monies allocated in past months. You gotta bring that over also. So you stay on balance. If you take the total of your income, and then I'm talking about the allocate a column here, he got the income and total income, he got all your expenses, you got your total expenses, then you have allocated amount which is the difference between income minus your expenses and you allocate amount to come to Xero. He might have to do a formula down below that that shows you your current amount. So if he got $500 Already allocate it you're gonna show a $500 balance, you put in$1,000 paycheck now, monies to be allocated down at the bottom should show $1,000. If you allocate 100, it should show 900. If you allocate it 800, it should show 900 or 100 remaining. So you go look at that bottom formula, at which is your total allocate it less your total income gives you your remaining unallocated balance. And when that gets to zero, you're done. If you do this correctly, your checking account will never go negative, because you're only spending money that you have in your checking account, and you're not gonna allocate it or put the money to use until it's in the checking account, then once it's in there, whenever the due date of that bill comes up, is when you're gonna pay it and you're gonna take it back down to zero. That doesn't mean later in the month, you can't reallocate more money for that category, yes, you can, then you got to carry it forward. That's in a nutshell how you get your allocated column to work for you. Now I'm going to talk about before your budget should be set up income at the top, then your needs housing, transportation, food, maybe some clothing and I talked about that in the last episode. After that, which I've never talked about is your wants, or things that you pay on some time period. So the first section I would do is what do you pay for every day that comes out your checking account? Do you go to the coffee shop and buy a latte every morning and charge it on your debit card, then that would be a daily purchase. If you have what do you pay on a weekly basis, maybe childcare you pay once a week. So you would allocate childcare on a weekly basis, then you have monthly, the monthly expenses would be things that not all that you hadn't already accounted for. It's not housing, it's not transportation, it's not food. It's other things that you may pay on a monthly basis that some miscellaneous is like insurance, you might pay for disability insurance on a monthly basis, you might be paying for health insurance on a monthly basis. You might have some payments you do monthly, that's not and your needs. So that would be that core category. Then you do quarterly, what do you pay every three months, maybe insurance, car insurance? Well, that'd be in their insurance, but some type of insurance that's not somewhere else. Or as savings, maybe you put money every quarter in the savings account, then you have semi annual something you pay twice a year, then you have annual something you pay once a year, such as subscriptions for virus, computer software, on your computer, things like that. So you categorize it by Dale, how you are paying for it daily, weekly, monthly, quarterly, semi annual, annual, and try to get as many of those items accounted for and your budget. And then when you're allocating for something you pay once a year, say homeowners insurance, you can then set aside some money every month, so that when the time comes, you have the money to make the payment, you're not scrambling to come up with 1000 bucks, you only got to come up with 10 bucks because you already got $990 already set aside to cover that expense. So I hope that is shed some light on everything and I hope it's helpful. So if you have any questions, feel free to contact me through my email. You can find my email address in my footnotes