Thing is, there is still slavery in this world - lots of it.
No, I'm not talking about sex slavery and human trafficking.
I'm not talking about labor slavery or sweat shops.
What I'm talking about it is slavery that is all around us, it has a firm hold of most people.
It robs people of their freedom, their joy, their very chance at success.
Debt is modern slavery. It is financial slavery.
Debt has too many people on the ropes, beholden unto their creditors. Debt service causes so many people to go to work nearly every day to give up much, or even most!, of what they earn and turn it over to their lenders.
Working all day to give the fruits of their labors to someone else. Is that not slavery?! To work all day and see little or nothing of your just reward?!
Debt is a killer. Debt is a menace in the lives of too many people. Perhaps you know someone who is in financial slavery? Even more likely is that you know people who you think are doing just fine, but who are, in fact, financial slaves.
Doctors, Lawyers, Business Executives, Intellectuals, not to mention people whose job titles don't have nearly as much status! Baristas, Car Sales Representatives, Real Estate Agents, Teachers, Police Officers, Clerks, Receptionists, heck, even Accountants!
I've met people who were earning seven figures who were financial slaves! Their entire life was devoted to earning enough to make the next payment!
Sure, things looked good...
- Big house? check.
- Fancy cars? check.
- Jealousy-inspiring vacations (complete with humble-brag social media posts)? check.
But it was all a sham. They were broke.
- The big house : mortgaged to the hilt.
- The fancy cars : leased.
- The cool vacations : on the credit card.
They were running at what I like to call Financial Redline.
That's the level where there is as much (or more) money going out as coming in! There's no reserve. They're maxed-out.
Lots of people are living at Financial Redline. Just look at how many American families live paycheck to paycheck.
People don't set out to live at Financial Redline. People don't plan to work all day just to wonder at night "where did all the money go?"
Ask people and they'll tell you:
"It just happens"
"The money just disappears"
"I don't know where it all went"
"I never thought it would turn out like this."
Does any of that sound familiar? Or does it sound like someone you know?
It sounds terrible is what it sounds like. It is financial slavery.
Here at Advancing to Greater that will not do. We seek the better way.
So - how do we advance towards greater from the point we are at today?
Step 1. Immediately cut up your credit cards.
You are forbidden from putting one more thing on a credit card.
You are forbidden from putting one more thing on a credit card.
Every rationalization for using credit cards is not worth the temptation to go further into debt. Forget the points/airline miles/gasoline rebates/etc. Those are merely the seductions of the devil (or pick your own favorite bad guy that is trying to get you further into debt).
Step 2. Set aside $1,500 in cash.
This is your itty-bitty Emergency Fund for unforeseen expenses.
This is your itty-bitty Emergency Fund for unforeseen expenses.
This is cash that you are only allowed to use if there is truly no other way to cover the cost of some sudden, unexpected expense (like a flat tire). If there is something that you can foresee having to spend money on in the future, from now on, you start saving ahead of time to be able to pay for it all at once when the time comes.
Step 3. Assess.
Gather up the paperwork for all of your recurring expenses and bills and money that you owe. Grab a piece of blank paper and a pencil.
Gather up the paperwork for all of your recurring expenses and bills and money that you owe. Grab a piece of blank paper and a pencil.
List out on your piece of paper all of your recurring expenses and bills. All of them.
(Yes, even that $50 that you owe the dentist and the $30 you owe your friend Fred.)
Step 4. Plan of Attack.
Re-write the list of expenses, bills, and monies owed in order from smallest total amount first to lowest total amount. If you are looking at something like a credit card statement, you are looking for the total amount that you owe - not the monthly payment amount due.
Re-write the list of expenses, bills, and monies owed in order from smallest total amount first to lowest total amount. If you are looking at something like a credit card statement, you are looking for the total amount that you owe - not the monthly payment amount due.
Step 5. Cut Back.
Start deciding what things you can do without (for now) in order to start backing off from the Financial Redline. You've got to create a little breathing room so that you can start to make progress.
Start deciding what things you can do without (for now) in order to start backing off from the Financial Redline. You've got to create a little breathing room so that you can start to make progress.
Here are some ideas:
- Cancel the cable service.
- Cancel the extra cellular service.
- Cancel the data service on your cell phone.
Now is also the time to develop a thorough Spending Plan.
Most other people would call it a budget, but here at Advancing to Greater, we prefer to use a more helpful name for it.
A Spending Plan is a plan for the money that will intentionally and specifically leave your bank accounts to pay for things. A Spending Plan requires us to think about whether or not spending $20 per workweek at Starbucks is really all that wise. It forces us to confront our bills and spending habits ahead of time so that we can assign jobs to each dollar that we earn. Habits are really key to a useful Spending Plan. Taking the car to be washed every week? That adds up. Does the dog really need to see a groomer while you are fighting off the shackles of financial slavery?!
Think about your spending habits carefully. Looking at your past spending by going through bank statements can be helpful and enlightening.
Use another sheet of paper to write out a Spending Plan for the next month. Its okay to use general numbers at first. After a few months of practice, your Spending Plan will be tight and every dollar will know what it is assigned to do ahead of time.
All 5 of those steps can be done in a day! Congratulations. You are seizing control and you are making progress already. Now to start making real progress...
From now on, as your payments come due, you will divert all extra money that you can find to paying off the smallest bills first. On every other bill you will pay the minimum amount due.
For example, if you owe your friend Fred $30 and you owe the dentist $50, you pay Fred and the dentist first and then, with whatever extra money you have, you start paying off your other bills.
Next month, you pay the minimum amount due on all your bills, but you add the extra that you no longer owe to the next smallest bill with a balance outstanding. For example, if you owe $100 on a gasoline credit card, you make your minimum payments on all of your bills, but on the gasoline credit card, you now include the $80 that you no longer have to pay Fred and the dentist.
The month after that you will pay off the gasoline credit card and take whatever is left over and pay that towards the balance of your next-lowest outstanding balance.
Dave Ramsey has a book about personal finance called Total Money Makeover and its section on paying off debt is the best around. I disagree with much of what else he writes, but his debt snowball explanation and worksheets are the best. If you have a significant other, buy two copies of the book so you can read it at the same time, together.
A debt snowball is a powerful tool. Commit to it and do not deviate from the plan.
Step 7. Growing your Emergency Fund.
Once your debt snowball has crushed your consumer debts, you are likely left with your car payments, student loan payments, and mortgage/rent. We will take a breather at this point from the debt snowball and instead, divert the debt snowball money into your Emergency Fund until it grows to $2,000. That two thousand dollars will be your new Not So Itty Bitty Emergency Fund, though the same rules apply. This is for unforeseen expenses; ones that could not be planned for. Anything that you could plan for must be saved for.
Step 8. Deciding to downsize.
For most people, this is the appropriate time to consider downsizing cars and houses because using a debt snowball to pay down consumer debt should not take too many months. (If you are in extreme financial slavery, however, downsizing might be a good idea as you begin your debt snowball.)
For most people, this is the appropriate time to consider downsizing cars and houses because using a debt snowball to pay down consumer debt should not take too many months. (If you are in extreme financial slavery, however, downsizing might be a good idea as you begin your debt snowball.)
The cost and size of your house is the single-largest determinant of how much you spend every single month. That is because it has a whole bunch of follow-on costs associated with it. They have larger and fancier landscaping and a higher expectation in the neighborhood of how your property is supposed to look. They use more energy and more water. They tend to encourage the ownership of commensurately expensive cars. They cost more to insure and they cost more to maintain.
The same goes for cars. Bigger, faster, nicer, more expensive cars tend to cost more per month in payments. They are more expensive to insure and maintain.
Choosing to downsize your house and cars is a big decision for most people and I understand people's hesitancy to make such drastic changes. Think, though, of how much those things are costing you and how much more you could pay off, and how much faster you could do it. Then think of how much faster you can start saving and investing with lower overall ownership costs for both your home and car.
Step 9. Debt Snowball part two.
Now we tackle the car loans and student loans. Simply arrange them in the same way you did with the consumer debts, smallest total outstanding balance to largest. Use the entirety of the amount from your debt snowball to start paying down your car(s) and student loan(s).
It is possible that you will have to specify how you want the extra money you are paying to be applied (to pay down the outstanding principal balance). You may have to follow specific instructions in order to ensure that your extra payment(s) go towards principal reduction. Feel free to ask the organization that you are making payments to how to do that - they will be happy to help.
It is possible that you will have to specify how you want the extra money you are paying to be applied (to pay down the outstanding principal balance). You may have to follow specific instructions in order to ensure that your extra payment(s) go towards principal reduction. Feel free to ask the organization that you are making payments to how to do that - they will be happy to help.
Step 10. Emergency Fund
Once your other debts are paid off, the only thing outstanding should be your mortgage, which we will come back to in a few months. For now, though, we are going to build up your Not So Itty Bitty Emergency Fund into a Proper Emergency Fund.
In order to figure out how long to keep piling your debt snowball money into your Proper Emergency Fund, we first have to gauge a couple things. The amount of money in this account should grow to be enough to allow you to survive for as long as you might need it to support you. For some people whose jobs are very secure and whose risk of debilitating injury is very low, the amount can be quite a lot lower than someone whose income is riskier (like a real estate agent) or whose lifestyle is more risky (like an amateur extreme sport enthusiast). For those with lower risks, an appropriate amount might be 3-6 months of monthly expenses. For those with higher risks, an appropriate amount might be 6-12 months of monthly expenses.
One other consideration is how long would it take for you to get another job in your industry? If you are in an industry like law enforcement where thorough background investigations take a long time, you might need more than if you are a sales representative.
Step 11. Investing and Paying off the Mortgage
Now that all of your debts are gone except for your mortgage and you have a Proper Emergency Fund. It is time to start investing. Use some money from your final (biggest) Debt Snowball amount to divide between investing and paying off your mortgage.
Not everyone can be an expert at investing, since it requires so much time and attention. However, I can simplify this for you.
First, when it comes time to invest, create an account for yourself at any of the major online discount brokers. Do a little bit of checking around to see which you like best. Click on the little "Open an Account" button on their page to begin the process - they will walk you through it. Its easy, don't worry.
If your employer provides an retirement investment option, take it. Whether it is a 401K or a 457b or a deferred compensation plan, take advantage of it.
The only advice I will give you here is to only invest in chunks of $500 or more.
I don't mean to tell you that you cannot set aside less than $500 per month, not at all! You can transfer any amount of cash you want into your online investing brokerage account every month.
I just want to advise you to only purchase stock in blocks of $500 or more at a time in order to avoid paying too much in commissions. Commissions are how brokerages make their money in order to provide their service to you. If you are using a brokerage that charges $9.99 per trade, that ten dollars is 2% of each $500 that you invest. That's why investing in $500 or larger chunks is wise - it helps to minimize your commissions.
Now here's what you invest in.
Not everyone can be an expert at investing, since it requires so much time and attention. However, I can simplify this for you.
First, when it comes time to invest, create an account for yourself at any of the major online discount brokers. Do a little bit of checking around to see which you like best. Click on the little "Open an Account" button on their page to begin the process - they will walk you through it. Its easy, don't worry.
If your employer provides an retirement investment option, take it. Whether it is a 401K or a 457b or a deferred compensation plan, take advantage of it.
The only advice I will give you here is to only invest in chunks of $500 or more.
I don't mean to tell you that you cannot set aside less than $500 per month, not at all! You can transfer any amount of cash you want into your online investing brokerage account every month.
I just want to advise you to only purchase stock in blocks of $500 or more at a time in order to avoid paying too much in commissions. Commissions are how brokerages make their money in order to provide their service to you. If you are using a brokerage that charges $9.99 per trade, that ten dollars is 2% of each $500 that you invest. That's why investing in $500 or larger chunks is wise - it helps to minimize your commissions.
Now here's what you invest in.
VTI is the Vanguard Total Stock Market Index ETF (exchange traded fund). It is a fund which tracks the total stock market, not like the Dow with merely 30 stocks or just the biggest 500 as the S&P 500 does.
Having that many stocks tracked in VTI gives you built-in diversification.
Further, it is really really cheap to own, which is tremendously important.
The nice thing is that it outperforms the market without you having to do anything. Here, look:
Now the other thing you must do is enroll it in a Dividend Re-Investment Plan (DRIP). A DRIP will take the dividends you receive every three months and automatically re-invest them for you into more shares of VTI. That will allow your returns to compound over time (Instead of having 100 shares of VTI you suddenly have 100.5 shares of VTI). Usually DRIPs are free too, which is another added bonus.
Follow the free information about when to buy and sell VTI which is shared at the bottom of the posts at https://www.facebook.com/RBpublications/
Paying off the Mortgage.
Do you know what mortgage means?
Mort means death.
Gage means grip.
Mortgage actually means deathgrip! Would you have signed up for one if you knew that?!
Each month pay down some of the principal amount outstanding on your mortgage.
Often you will have to specify how the extra money you are paying is to be assigned. Make sure that you follow whatever instructions your mortgage service company tells you for applying extra money towards the principal amount that you owe.
When I was doing this with Bank of America, I merely had to click a little dot next to my online payment that told BofA whether the payment was a regular payment or if it was for the escrow account only or if it was for principal only.
When you pay down your mortgage balance regularly you'll be surprised at how fast it melts away!
Step 12. Legacy Planning
Leave your comments and questions. I read them all, but I may not be able to respond to them all. Feel free to email me at rich@advancingtogreater.com
Follow the free information about when to buy and sell VTI which is shared at the bottom of the posts at https://www.facebook.com/RBpublications/
Paying off the Mortgage.
Do you know what mortgage means?
Mort means death.
Gage means grip.
Mortgage actually means deathgrip! Would you have signed up for one if you knew that?!
Each month pay down some of the principal amount outstanding on your mortgage.
Often you will have to specify how the extra money you are paying is to be assigned. Make sure that you follow whatever instructions your mortgage service company tells you for applying extra money towards the principal amount that you owe.
When I was doing this with Bank of America, I merely had to click a little dot next to my online payment that told BofA whether the payment was a regular payment or if it was for the escrow account only or if it was for principal only.
When you pay down your mortgage balance regularly you'll be surprised at how fast it melts away!
Step 12. Legacy Planning
- Plan for your next car - you will never have another car loan payment so you need to start saving now.
- Plan for your kids' education expenses so that they don't start their adult life with a huge student loan.
- Plan for your next home. You will never have another mortgage so you need to start saving now.
- Plan for your eventual failing health - its expensive, unfortunately.
- Plan for your inevitable passing. Memento Mori.
- Plan your next vacation. This one will not be going on a credit card - it'll be saved for and paid for in advance! You'll be able to enjoy your vacation much more too, without the nagging dread of credit card payments stretching out into the future.
- If you have the means, plan for your kids' wealth and lack of debt. Consult an estate planning attorney for the best means of transferring wealth down through generations.
Leave your comments and questions. I read them all, but I may not be able to respond to them all. Feel free to email me at rich@advancingtogreater.com
