How to FINALLY Get Out of Debt | 7 Steps to Debt Freedom

everybody rob burger here welcome back to the financial freedom show today we're going to talk about how you can once and for all finally get out of debt you cannot have financial freedom when you're drowning in debt and i can tell you that from firsthand experience i'm gonna walk through in today's video the exact seven steps that i took to get out of debt and we're talking i hate to say this we're talking hundreds of thousands of dollars in debt it wasn't like i had you know a two thousand dollar credit card i had uh student loans my wife had student loans we had car loans and we had a pretty massive home equity line of credit all of that was in in addition to our mortgage and so here's the deal one day i was in our basement and i was listening to the dave ramsey show and i don't really listen to the dave ramsey show that often but if you've listened to a show you know that folks you know call in and they scream or yell that they're debt free and it was like one after another and i was like i got tired of hearing it it's like i want to be that person no i've never called into the dave ramsey show but i wanted to be debt free and in fact let me show you this probably can't read it i'll read it to you this is a note that i wrote to myself that day i mean i'm listening to the dave ramsey show i'm sick of all the debt we're in i'm hearing all these people calling and you know screaming they're debt-free so here's what i wrote june 15 2005 i even put the time it was 6 31 pm and i said i will be totally debt free by june 15 2012. i gave myself seven years and i even underlined totally because in my mind i included the mortgage and guess what we failed right june 15 2012 we weren't totally debt free but we were on our way and a couple of years later we were totally debt-free and then at least all the debts except our mortgage and then eventually we were even free of our mortgage so i'm going to walk through today the exact seven steps that i use to accomplish that now i want to be kind of upfront about this first of all this video is for people that are serious about getting out of debt you're willing to do everything you can well as long as it's legal and moral to get out of debt if you're kind of just ah maybe kind of sort if you're wishy-washy about it frankly you might just stop watching the video this is not for you this is about people who like me in june of 2005 had had enough and i wanted to get out of debt that's the first thing i want to tell you before we get to the seven steps the second thing is sort of a a mental model that i want you to keep in mind i call it the what if when we're presented with ideas to accomplish something particularly in the world of finance immediately we can come up with if you're like me a dozen reasons why it won't work that won't work because of this reason or that reason and what i want to encourage you to do as we go through the seven steps is to at least keep an open mind and ask okay yeah it seems impossible for me to sell my car but what if i did now as you do that you may conclude after you've given it a lot of thought and walk through these what-if questions yeah i can't sell my car that's not a good decision but you shouldn't immediately object to it keep an open mind ask what if well what if i did that well these three problems would be created all right well how might i solve those problems keep an open mind as we go through the seven steps so with that let's get started and the first one maybe the most obvious but it's one that i see skipped over a lot and that is you got to say no to any new debt if we go back to june 2005 i'd made this commitment i'd written it down and wouldn't you know we're out shopping for some furniture and what do they offer us but zero percent financing for 12 months and at first i thought well that makes sense i can keep the money in a savings account earn a little bit of of interest it won't cost me anything i started to justify the new debt and then i remembered my commitment that i had written down i said you know i'm not going to go into more debt even if it seems like a good deal one of the reasons was that i was afraid it would cause us to spend more on furniture than we otherwise would when you've got to actually take the money out of the bank out of the checking account or out of the savings account and spend it it hurts it hurts a lot and it affects how you spend your money so step one is you've got to say no to any and all new debt now that may mean you have to take some radical steps maybe you have to cut up your credit cards i'm not sure i'd close the accounts necessarily that could hurt your credit score but you may need you may need to cut them up so that you don't use them or at least put them away so you're not carrying them around and can be tempted to use them the other thing you've got to do is understand where your money is going now you know they call that budgeting and a lot of people don't like that word that's fine call it whatever you want call it your your debt freedom spreadsheet or something a little more positive but you have to understand where your money is going there are plenty of free tools you can do you can use to do that mint.com is one personal capital is another even just use a spreadsheet what i wouldn't do is pay for any tools right now there are some good paid tools out there why nav you need a budget is one i use tiller money i think it's an excellent tool but remember we're getting radical about getting out of debt and as you'll see we need every dime we can muster to put towards our debt so use a free tool just use a piece of paper and a pencil or a spreadsheet if need be but you need to have an understanding of where your money's going and we'll come back to why that's important in just a minute now that's step one no new debt step two pretty straightforward but you need to understand the debt that you have i've talked to a lot of people and i'll ask them you know what's the interest rate on that debt you have and they don't know and i'll ask them well what's what's the balance on it how much you know how much do you still owe and they're not sure about that either so you want to take out a piece of paper or a spreadsheet and you want to write down every single debt that you have and you want to just record a couple of things you want to know who the who you owe you want to know what the balance is what's the outstanding balance if you wanted to pay it in full today how much would you have to pay you want to know the interest rate it's very important we'll come back to why in a minute and then you'll want to know your minimum monthly payment and for that one in addition to knowing the minimum monthly payment for each of your debts i want you to add up the minimum monthly payment as well the total so how much do you absolutely have to pay each and every month just to make the minimum payment so that's step two we've really got to as painful as it may be to look at all this stuff we've got to know our debts we've got to know them well uh this information will be used as we go through the remaining steps and in fact it starts with step three and this is where we need to remember that what if uh strategy i talked about and that is get rid of any debts that we can and oftentimes that is from selling something associated with the debt the most frequent common example of that is a car and again this is where a lot of objections uh can be raised and i get that but we need to ask if you're if you owe say 20 grand on a car and you're trying to get out of debt and you've got credit card debt and medical debt and other things as well you can put a serious dent in your debt by selling that car now there are plenty of objections one might be that you're underwater you owe more on the car that it's worth so if you sold it you'd actually have to borrow money but potentially to make up the difference and then there's the question of how you're going to get back and forth to work or to the store but what you may be able to do is just buy a junker something that you know runs that cost a couple grand and can can meet your needs for now and yes you may have to borrow money to make up the difference between what you owe in the in the value of the car but the end result could be taking say a twenty thousand dollar debt and reducing it to three or four or five thousand dollars it's at least worth uh considering the other thing you might consider is if you've bought things recently that can still be returned and the charge is removed from your credit card you need to consider doing it again we're trying to get radical about our debt and we want to get rid of as much of it as we can right up front in our case we had a car we didn't owe anything on but we didn't need it uh i loved that car i have to be honest with you it was an acura so back in 19 let's see early 2000s i loved that car uh but you know what i i didn't love it as much as our debt getting rid of our debt so i sold the car took the money and um and paid down debt and so as part of getting rid of debt you can also sell stuff that's not necessarily associated with one of your loans right you can you can have a yard sale you can sell everything that you have that you don't need and the question is always is the thing that you own more important to you than reducing your debt so step three is getting rid of as much debt as you can almost instantly by either selling something associated with the debt or other stuff that you simply don't need that can help you pay down your debt faster that's step three we did it it helped a lot to sort of supercharge the debt freedom journey all right number four step four of seven steps is you wanna lower your interest rates where you can and this goes back to that the list of all of your loans one of the things i had you write down was the interest rate that you're paying uh on all of the loans and you want to go loan by loan and ask can i somehow lower the interest rate on this loan if it's credit cards you might consider a zero percent balance transfer credit card you can transfer balances over to a zero percent card there's usually a fee standard is three percent of the amount transferred but if you're transferring debt that's you know at 15 or 20 or even 25 percent that three percent is a pretty good deal now i'll tell you to qualify for a good zero percent balance transfer card you you probably need a credit score in the high 600s if not into the low 700s if you don't have that if your credit score is in the low 600s or 500s or even lower i wouldn't frankly waste your time with this but if you have the credit score and you have credit card debt it can be a great way to lower the interest rate now you can do the same thing with just about any loan you can refinance a car loan so there are plenty of ways to lower the interest rates on any loan depending on what type it is it may be practical for you it may not be but it's something that we should at least consider and keep in mind when you do that if you're able to reduce the interest rate on a loan it does a couple of things one it can reduce your monthly payments depends on the term of the new loan but it can reduce your monthly payments but frankly even more importantly it'll free up money that was going to interest payments and apply it instead to the balance of your loans and that will help you pay down your debts faster so that's step four if you can lower your interest rates on the loans that you have all right step five is increase your income now i know that's sort of an easy thing to say but this can supercharge your debt paydown and i'm going to show you a specific example but we know we've mentioned selling stuff that's certainly some ways to to to get extra cash to pay down your debt some of the things i've done in the past you get a second job or some of you with two jobs you get a third job now again uh depending on your circumstances this may or may not be practical but remember are we we're really focused on and willing to do just about anything to get out of debt even a relatively small amount of extra income can go a long way to paying off your debt i want to give you a specific example and this one is with a side hustle so maybe you can't get a second or third job but there are plenty of side hustles out there where you can earn a little extra money one of them of course is a youtube channel and i started this youtube channel a little over a year ago and it makes me a little bit of money am i a multi-millionaire because of my youtube channel no but i want to show you um exactly how uh even a small amount of money can help you supercharge your your debt debt freedom journey so this is what i'm showing you now is a debt payoff calculator i'll leave a link to it below the video and i'm going to assume a 10 000 loan and we'll assume an interest rate oh we'll put 15 in and we'll uh say 200 is the minimum payment that's two percent of the loan amount and with those assumptions you can see here it's going to take us about six and a half years to pay off the debt and uh it's going to cost us about 5 800 in interest well using my youtube example last month i made about four hundred dollars in advertising revenue from my channel again uh i'm not a multi-millionaire from the youtube uh it's not enough money to like retire and kick back for the rest of my life but it's 400 bucks and i'll take it well if we use that money to add to our debt repayment what impact would it have now remember without it six and a half years and just under 5800 in interest to pay off a ten thousand dollar debt if we add the four hundred dollars a month in extra payments look at that it drops to just one and a half years and the total interest drops from six thousand to under thirteen hundred dollars the real key takeaway is that adding even relatively small amounts of money to what you're paying off on your debts each month will significantly decrease both the time it takes you to get out of debt and the interest that you pay now for you it may not be 400 bucks it may be 50 bucks it may be for some of you more but if you can generate that extra income whether it's from a side hustle a second job selling stuff whatever you can do apply it to your debt it's going to significantly speed up your journey to getting out of debt i can tell you what i did back in in 2005 actually two years later was i started a personal finance blog and trust me to begin with it made almost nothing i mean i think the first six months working night and day on it i made a hundred dollars total that's not per month that was for six months but over time it started to make a little bit more money and a little bit more and i was able to apply that money uh to our debt and it and the result was exactly what i just showed you in the calculator it supercharged our journey uh to debt freedom all right we got two more to go these are both critical number six is reduce your expenses now you know i know that's sort of an easy thing to say but i want to give you a specific strategy we all know we can reduce our expenses by you know not eating out as much not you know spending as much money on clothing or gadgets or taking as expensive vacations if you even take a vacation you don't need you know youtube video to tell you that but what i came up with when i was trying to get out of debt was are there ways that i can reduce our expenses without actually sacrificing our lifestyle we can certainly save money by changing our lifestyle but are there ways to save money without changing our lifestyle i ended up calling these painless ways to save money and it actually led to something that i call the money audit and it's really simple what we do is we go through all of our monthly bills so this isn't you know shopping for groceries or clothes but the actual monthly bills so this would include gym memberships all our streaming services any insurance that we have of course rent and mortgage all of the loan payments but you know list all of our monthly bills and i go down through them one by one by one and i ask basically two questions do i need it you know if we have five streaming services can i get rid of three or four or five of them do i really need all of them do i really need that gym membership now again this is where you need to ask that what if what if i got rid of these things how much would it really impact my life you very well may choose to keep some or all of them that's fine but you should at least ask the question through each monthly bill do i really need this is it as important to me as getting out of debt you have to make that decision for yourself i can't make it but that's exactly what we did and what we found was when we got rid of some of those bills that we thought might be painful we thought they might have a big impact on our lifestyle turns out they really didn't some of them had absolutely no impact at all for example we lowered our car insurance by increasing our deductible you may shop for car insurance with different carriers and reduce what you're paying that's a perfect example of saving money with absolutely no change to the way you're living now what's really critical about this is when you are able to save money by going through this money audit that i've described you absolutely need to put it towards your debt again it could be because you get rid of things you don't need like maybe your fifth uh streaming service or you save money on something you need like getting a better deal on car insurance whatever your approaches are make sure you take what you save add it to your the total that you're putting towards all of your debt and keep making those payments every single month if you just save the money and forget about it you're going to end up spending it on something else all right our seventh and final step is really really critical and it's that you need to use the debt snowball method so what is that so the idea is when you add up all your your monthly minimum payments whatever that totals plus all the extra money you're putting towards your debt whatever that is you're going to continue to put that amount of money towards all of your debt until you're completely debt free now what does that mean well keep in mind that over time if you have more than one debt one of them over time is going to get paid off and when that happens your total minimum monthly payments of course are going to go down because the debt you just paid off you no longer have a minimum monthly payment with the debt snowball method though you're not going to reduce what you're paying on your other debts by that minimum monthly payment you no longer owe you're simply going to take whatever that was and apply it to one of your existing debts this will significantly decrease the time it takes you to get out of debt and it's going to significantly decrease the amount of interest now one of the questions that comes up that i get asked a lot they say rob that's fine but which debt should i tackle first what should be my priority well there are two sort of schools of thought here one of them is uh focus on the debt with the smallest balance that's sort of the dave ramsey approach um and the theory behind it is if you can get out of a debt quickly psychologically that's you know it's uplifting that that really helps motivate you to keep going on your your debt journey and i think there's a lot of truth behind that and a lot of studies support that but that's not the only approach some say well wait a minute it doesn't make a lot of sense to tackle a small debt if you have other debt out there that has a really large interest rate so maybe you have a a five thousand dollar say student loan that's only four or five percent uh and you've got a forty thousand dollar credit card it's at twenty-five percent yeah it might feel good uh to pay off that five thousand dollar loan quickly but you're paying a ton in interest on a much larger debt with the credit card so what some say is forget the the loan size instead focus on the debt with the highest interest rate and some call that the debt avalanche method look at the end of the day what's really really important is that you do what works for you the key is to continue to put all of this money your minimum payments plus anything else you're able to to shake free towards your debt until they're all paid off if you want to focus on the smallest debt first because it's going to feel good to pay it off that's fine if you want to focus on the debt with the highest interest rate uh because you want to reduce your interest payments that's great too the real key is to one do what works best for you and two understand the consequences you know the ramifications of your decision and you do that again going all the way back to the start of this video by understanding all the debts that you have and the interest rates that they charge the real key is not which one you pay off first per se but that you take all of the money you can towards your debt and continue to put that same amount towards all of your debt until you're totally debt-free that's exactly what my wife and i did did we meet our june 15 2012 goal no we didn't it took us a couple years longer but i got to tell you it's a great feeling when you're finally debt free i hope this video helps you i hope you can put into into application the steps that i've outlined if you have any questions please leave them in the comments below i'll help you out any way you can if you like this video please give it a like and consider subscribing to the channel until next time remember the best thing money can buy is financial freedom

Channel: Rob Berger

Views: 409,162

Keywords: dave ramsey, pay off debt, how to pay off debt, how to get out of debt, debt snowball, debt free, debt payoff, the dave ramsey show, how to pay off debt fast, paying off debt, debt free journey, how to pay down debt, financial freedom, debt free living, get out of debt, get out of debt fast, debt freedom, debt free scream, paying down debt, pay down debt, debt snowball method, debt free life, dave ramseys baby step 2, financial peace, debt tips

Id: 1MDQ32T2_Bg

Length: 21min 57sec (1317 seconds)

Published: Fri May 07 2021