Financial Freedom in 2021! Take Action: Day 17
You now have several tactics lined up for saving on monthly and annual expenses, as well as a few ideas for making extra cash. Now, each dollar needs a job so that it doesn’t end up in the wrong place. If you have debt, several of those dollars may need to take on the job of paying that down.
Where do you start? First, know what you owe. When you were calculating your net worth on Take Action: Day 1, you had to enter Liabilities into the calculator. Those are debts, and some could be considered “good” debt while others are considered “bad ” debt.
Good Debt allows you to make an income or grow your net worth through a low-interest investment, such as a mortgage on your home or your student loans. You still want to aim to pay them off at some point, but you’re hopefully receiving greater value than the interest you’re paying on it.
Bad Debt is high-interest consumer debt, such as credit cards or personal loans. These debts and the interest you pay on them will significantly delay you on your path to financial independence. You want to pay off bad debts first.
There are also different methods to paying off that bad debt. You probably hear a lot about debt snowball vs. debt avalanche.
Debt snowball: You focus on paying off your smallest debt first (while paying minimums on the others), then roll the amount you had been paying on it into payments on the next largest.
Debt avalanche: You pay off your debt with the highest interest rate first (while paying minimums on the others), then the next highest rate, and so on. It may save you time and money over the course of your debt payoff.
Source: Nerd Wallet: Pay Off Your Debt
If you’re carrying any bad debt, pick a plan above to pay that off first. Then, go after the car debt and student loan debt. Once you get a little momentum, that debt will be paid off before you know it, and your money will be available for saving toward priorities and investing in the future. Plus, you’ll feel so free!
If, upon reading this post, you have zero debt (other than a mortgage), congratulations! Today’s action step is to make a plan not to incur any debt this year. If a big purchase is coming up, have a strategy for paying for it in cash. You can try a short term savings method for a big purchase rather than resorting to using credit.
Here’s how… Calculate what the item or trip costs with all additional taxes and fees. Then, determine how many months you have until that specific purchase. Say you want to set aside $250/month to purchase a new dining room table at $1750 in 7 months. What are you able to give up completely for just 7 months? Maybe you can do at-home haircuts for a savings of $80/month. Maybe you can give up cable or TV streaming for a savings of $60/month. Maybe you can boycott shoes- and clothes-shopping for that time period for a savings of $60/month and choose an at-home meal instead of one night of dining out with the family for a $50 savings. Another option is to put the money you save from challenges like spend-nothing weeks or a free-activity month toward that total.
Then, after you make the purchase you saved for, you can decide whether you want to re-up your TV streaming service, go back to salon haircuts, and replace a few pairs of shoes … or you might not. You may have found even more areas to cut your spending long-term.