Hello again!!
In the last couple of posts I discussed how important time and choices are to your wealth building journey. In order to begin to build wealth for yourself and your household, you need to clear your path of obstacles in order for your money to work for you instead of against you. The most common barrier that stands between households and their ability to build wealth is consumer debt. The faster this barrier gets removed, the faster your money can grow for you. If you are currently struggling with debt, here is how you can begin to pave your way to financial freedom.
- Build a small emergency fund: Any unexpected emergency expense can occur at any time. The emergency car repair, home repair, or necessary doctor visit can present itself without notice. As I mentioned before, you don’t need a credit card for emergencies. You need to have actual money. If you don’t already have money saved outside of retirement accounts, create a small emergency fund. Usually $1,000 to $2,500 will suffice. This amount creates a small shield between you and life. It will help prevent you from pulling out a credit card if something happens. I suggest opening a different account separate from your normal banking institution, so it is separate from the rest of your money. Remember, this is not your normal savings account. It is for emergencies ONLY. However, you do need to have immediate access to it if an emergency does occur, so a money market account would more than likely be the best option. Money markets usually come with a little higher interest rates, although that’s not the priority, ability to write checks, and/or debit cards. Do not open your emergency fund with an account that has restrictions, such as, certificates of deposits, and you definitely do not want it in any kind of investment account.
- List all consumer debts starting with the smallest balance: This is the order you will use to pay off each lender. This list DOES NOT include the mortgage to your primary residence. It does include credit cards, school loans, vehicle loans, 401(K) or investment loans, money owed to family or friends, etc. The only debt that supersedes the smallest balance is debt you owe to any government agency like the IRS for back taxes. As previously mentioned, debt is the greatest barrier to wealth for most people. Interest rates on credit cards are over 20%, car loans average more than 12%, and student loans average between 5% and 8%. All debt makes others rich, not you.
- Suspend all retirement investing: The goal with this post is to help you clear your path to wealth. If you have any consumer debt and are unable to pay it off with any cash you currently have, temporarily suspend any contributions to your IRA or 401(k). However, it is important that you DO NOT make any withdrawals from your retirement accounts. Just suspend the contribution for now. Remember, time is of the essence. The faster you pay off the debt, the faster you can apply your money to your wealth building journey.
- Find extra cash: There are several ways to get extra cash. Garage sales are usually good for some extra money and many people have things around there home that they don’t need anymore. If you can get some extra money and clear some space in your home at the same time, why not do it? Starting a side hustle can also be advantageous. Are you or your spouse a good baker? Are you able to help mow lawns or do some form of landscaping for friends or neighbors? Using your skills and talents will not only benefit you and your household, but they can also provide comfort and aid to someone that is in need of some assistance. That’s a win for everybody? And, you never know where your skills and talents might lead you in the future. Also, get a second job. This is guaranteed extra income since it is another job. I know this sounds daunting, but it’s only for a short amount of time while you clear your path for wealth building.
- Payoff the debt, begin the smallest balance: I can’t state enough … TIME IS OF THE ESSENCE!! Go on the offensive in this battle between you and debt. Your first target is the weakest of the enemy… the smallest balance. Eliminate this lender and expel it from your life. Use your spending plan and income to your benefit. You’ll have one less lender and one less barrier to your wealth building. After you payoff the first one, use your payment amount and any additional funds to attack the next smallest balance. This process is commonly referred to as the “debt snowball”. Not only does it help you see progress as you move along, but it helps you realize bad habits and change behavior in the process. Once you have succeeded with the first couple of lenders, you’re on your way to clearing your path.
I hope this post is helpful!
Thank you for reading!
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