Get Out of Debt

hey what's up everyone welcome to the school personal finance my dad promised me that i will be in his intro and i hope you like me being in his videos how adorable is she she is a rock star so i'm away on vacation with my family this week and i thought it'd be the perfect time to do a flashback friday where i'm going to go back and i'm going to show you some highlights from a debt series that i put out a little over a year ago so i did like three weeks in a row videos all about how to get out of debt and over the last few weeks i've received a lot of emails and questions about the best way to get out of debt so i thought this would be a good time to do it the highlight of that video reel was the debt snowball the dave ramsey method for getting out of debt which works great so i go through a simple example of how to create your own debt snowball so i hope you enjoy this one let's get to it so now this first clip here was from a video that i put out called the bad debt blues and it's all about the mind frame and psychology and how crappy it is being in debt so let's watch this one first in simple terms the real reason people are in debt is because they have more money going out than they have coming in and you just can't sustain on that path so if you're spending more than what's coming in the only way to do that is to borrow money the solution is pretty simple either you increase your income or you decrease the amount that you're spending simple but not easy what is not a solution that you see most people try to do is borrow additional money to pay off old debts once you find yourself in the hole under a pile of debt psychology starts to kick in you start to think to yourself well i already owe all this money who cares if i buy something for a few hundred bucks or we go on vacation and it costs a few thousand dollars i deserve it so what i owe 30 grand on credit cards what's 32 grand or 33 grand just doesn't make that big of a difference i want new sneakers yeah i have no money but i could charge it and it's just going to add a little stone onto that already enormous rock pile i have in the backyard so who cares just do it but unfortunately little by little incrementally that debt pile grows bigger and it becomes harder and harder to dig yourself out from underneath it so why is it so hard to live without debt and the answer is pretty simple we've all been brainwashed that monthly affordable payments are a way to be able to buy anything that you want so if you want new furniture for your house you could finance it a nice monthly affordable payment if you want a brand new car every three years it's very possible all you need is a nice low monthly payment that you could afford you don't need 40 grand to go buy the car education you want to go to an expensive school no problem you could get student loans you could finance it for the next 20 years no matter what it is there is somebody who's willing to give you a nice affordable monthly payment so that you could go and you could do whatever you want now and unfortunately it catches up with you all of your future income has been committed to these nice low monthly payments that you have to make month in and month out and the problem is you have no money left over after you make all those nice low monthly payments what do you do you have no money to invest you have no emergency funds you have no way to grow your wealth you're committed to all these nice low monthly payments so you can afford everything in the world that you want and get it right now unfortunately that is not a way to get ahead financially and to become wealthy and live a stress-free life all that does is it just adds burdens it locks you in your job it gives you no flexibility it leads to a very stressful life a big focus for people should be to increase their income no matter what you have to do this day and age there are so many opportunities to increase your income there's only so much you could cut where you could make a difference if you already have a lot of debt so getting your income to go from here to here can make all the difference in the world all right i'm just gonna sneak in here for a second so now this next clip was from the three ways that credit cards screw you and i'm gonna talk about the first way in this clip right here so the first way that credit card companies can really stick it to you that you might not fully understand how it works is with the grace period so if you pay your credit card balance off in its entirety each and every billing cycle then you will not pay any interest so if you have a fresh new credit card you use it and you buy two thousand dollars worth of stuff you get your bill you pay the entire balance off by the due date you will owe no interest this is the way credit cards are supposed to be used where they get you is if you do carry a balance let's say in that example you didn't pay the whole thing off let's say that you paid nineteen hundred dollars of your two thousand dollar monthly bill so you carried a hundred dollars over to the next billing cycle by doing this you just put yourself in a really crappy situation because now going forward there's no grace period on your purchases the interest is going to start accumulating the day you make the purchase so if you now decide that you need to buy a new tv that costs twelve hundred dollars the day that you charge it you are going to start paying interest on that television on the twelve hundred dollar amount plus the hundred dollars that you carried over from the previous month so you no longer get that grace period where there's no interest being charged as long as you pay the balance at the end of the month all right so that was only the first way that they screw you if you want to see the other two ways go back and watch that video from a little over a year ago but no seriousness don't carry a balance on your credit card it's really where things begin to get ugly all right so now we're gonna go to the example of the debt snowball let's do it once you're in the right mind frame you've decided that there's nothing that's going to stop you that you're getting out of this crap and you're moving on this is what you need to do to get out we call it the debt snowball and this was really made famous by dave ramsey who wrote the book the total money makeover which is a great book if you're looking to get yourself out of debt so i'm going to show you a quick example here that makes it very simple for you to just copy so what you want to do is you want to list out every single debt that you have and you want to start with the lowest outstanding balance so set it up exactly how i have here with the different columns showing the name of the debt the balance that you have outstanding the monthly minimum payment and also the interest rate that you're being charged on that debt list amount smallest balance all the way down to the largest and then we're going to start your debt snowball so the concept behind this is that you are going to take that first item in this example it's the chase credit card with a 1300 balance and you are going to attack it with laser focus you are going to do whatever you can to pay that thirteen hundred dollars off and while you're completely focused on that all the other debts beneath it you are going to just pay the minimum payment on those until you have paid off that chase credit card so the whole key to this debt snowball working is that you have to be able to find extra money each month there has to be some savings that you're cutting from your expenses or some income that you're adding through either a second job or selling things there has to be found money that you could create through either of those two sources that you could now use towards paying down these debts and obviously the more money that you could find or create and pay down those debts with the quicker your debt snowball is going to pick up speed and start eliminating all of these debts let's just make the assumption that you could create or cut an additional four hundred dollars out of your monthly expenses so if you were able to take that four hundred dollars and use it to attack these debts that would be a very good starting point so if we look at that chase credit card you're currently paying the minimum payment of 25 bucks we add that 400 to it and now you're paying 425 every month on that credit card if you were able to do this it would only take you about three months and that debt would be eliminated and then the way the debt snowball works is you would now take that 425 dollars that you were paying to the chase credit card and you would roll it into that american express minimum payment that you're currently making that's the next one down the list of our snowball so for the american express card you're currently paying forty dollars every month so now we throw on top of that the 425 dollars that was going to chase and now you're paying 465 dollars per month towards that american express card this would only take you about four and a half months to now pay off that amex so look at that after seven and a half months or so you have knocked off the first two items on your debt snowball so now your snowball is getting bigger and going on down the mountain so the next item is that wells fargo deck so what you're able to do now is you could take that 465 dollars that was going to american express for the last four and a half months and roll that into the 96 dollar minimum payment that you're making on the wells fargo credit card so that's a total of 561 bucks that's now going to the wells fargo credit card and it would take you about eight and a half months to pay off that balance so i hope you're getting the hang of this it's pretty simple once you get going and remember the whole key is how much money can you start off with throwing at the debt so at this point it would have taken 16 months for you to pay off those first three items which was a total of 8 300 bucks in credit card debt not too bad so the next up would be the car loan which you owe 11 000 bucks on so on the car loan you would take that amount that was going towards the wells fargo credit card in previous months which was 561 bucks you add that to the 220 that you're currently paying on the car loan so it's a total of 781 that you could now attack that car loan with so the 11 000 car loan it would take you 14 months to bang that out so now the car loan would be done and then finally the only debt that you would have left is that 23 000 student loan so now at this point you have 781 bucks that you were just paying towards the car that you could then roll in to the 200 payment that you're making on the student loans so 981 dollars total that you could now pay your student loan with each month and now at that pace it would take you two years to knock out that 23 000 of student loan debt so now in total it would have taken you about four and a half years to pay off all of your bad debt forty two thousand three hundred bucks not bad considering you really only started with finding an extra four hundred dollars per month by cutting expenses or increasing your income with a second job if you get even more aggressive you could do this in half the time so at the end of this snowball that 981 dollars that you were using to pay the student loan debt there's no more debt so you can now use that money to invest that's a lot of money right that's almost twelve thousand dollars a year so you can use that money to start saving for retirement to fatten up your emergency fund to have a vacation fund to go do great things the world becomes your oyster you get out of the debt and all of a sudden things start opening up if you struggle with credit card debt and you have all these different payments that you're making every month and it's hard to stay on top of and keep track of and keep up with this is a great way to get a handle on that and to get very focused to get yourself out of this situation all right everyone that is it for this week i hope that you enjoyed this video make sure to hit that subscribe button if you have not subscribed to this channel yet hit that like button make it turn blue i will see you all again next friday thanks for being here

Channel: School of Personal Finance

Views: 3,520

Rating: 4.949367 out of 5

Keywords: get out of debt, debt snowball, pay off debt, Rich McCormack, dave ramsey debt snowball, financial education, credit card, credit card debt, debt free, pay off credit cards, how to get rid of credit card debt, credit cards maxed out, credit card interest rates, paying on credit cards, paying off debt, how to pay down debt, how to pay down credit card debt, get out of debt fast, how to pay off debt fast, how to pay off debt, get out of debt plan, get out of debt dave ramsey

Id: xUQX3o38sek

Length: 12min 20sec (740 seconds)

Published: Fri Jul 24 2020