Americans are swamped in $1 trillion of combined credit card debt, and they pay over $1200 a year on interest. In Australia, it’s not much better. If a person makes $80,000 a year, they end up spending more than $160,000 in that same year.
What if there was a different way? What if you could get out of the cycle of debt and Live Within Your Means comfortably?
The problem is the advice you get from most financial coaches is all wrong. They tell you to work towards Freedom from debt. They might think that’s good advice, but it’s not. Because that approach just doesn’t work.
If you choose a financial coach randomly, they’ll likely tell you that the secret to defeating debt is paying back your highest interest rate loans first. Logically, that makes sense. I mean, we spend huge amounts of money on interest, so paying off high interest rate loans first should get us debt free faster. Right?
Insanity: Doing The Same Thing Over And Over Again, Expecting The Same Result
Wrong. Because that advice just doesn’t work. The majority of people in the 96% live with thousands of dollars of debt, from car payments to student loans to credit card debt. That debt is just sitting there, hanging on, while they continue to add more debt, because they can’t break the cycle.
It Turns Out Humans Need Rewards
What the traditional advice doesn’t take into account is how humans are motivated. No matter how old you are, you’re not much different than a preschooler doing chores to get stickers on a chart. Rewards are huge when you’re motivating yourself.
A 2015 study found that rewarding good behavior, even with seemingly insignificant rewards, motivated good behavior more than punishing bad behavior did.
That same principle applies to debt termination. As a human, you need to be rewarded for your efforts. But when you pay back your highest interest rate loans first, you’re working against yourself. Those high interest rate loans take forever to pay back and, consequently, you get too discouraged. You might give up altogether, or worse, head to the mall to make yourself feel better. Either way, you’re adding to your debt rather than escaping.
In Financially Fit Bootcamp, we teach that you should start with the smallest debt regardless of the interest rate. Starting small and working toward your larger debts means that you actually see progress quickly. As you pay off one debt, you’re motivated to pay off the next debt, and so on.
Another motivating factor? As you pay off each debt, you progressively have more and more to add to the next payment.
The good news is that terminating debt this way works! As you can see in the video above, using the Financially Fit Bootcamp debt termination method, Linda Emslie and countless others are on their way to being debt free and even better, Financial Freedom.
Beat Debt And Move Into The 4%
Unfortunately, what we’ve found is that only 4% of the world understands that if you have debt, this is the way to pay it off. They are the truly wealthy ones. Are you ready to join the 4%? Here’s how it works:
First, continue to pay the minimum payments on all of your debts. Don’t incur any late payment fees or get sent to collections. Second, you’ll need your Pay Yourself First (PYF) number, so if you haven’t figured it out yet, work back through Financially Fit Bootcamp and determine that number.
Once you have your PYF, split it into three parts. One-third of that number goes into your emergency buffer. Add the other two-thirds of your PYF amount to the minimum payment of your smallest debt (we’ll call this minimum payment D1) to accelerate terminating that debt. Here’s the formula: ⅔ PYF + D1 = 1st Debt Repayment Amount.
After you’ve paid that small debt, you’ll add two-thirds of your PYF and D1 to the minimum payment of your next smallest debt (D2). In an equation, it would look like this: ⅔ PYF + D1 + D2 = 2nd Debt Repayment Amount. Do you see how this snowballs as you’re putting more money toward each debt? So as your total debt shrinks, the amount of money you’re paying towards it increases.
Move Past Debt Paralysis
As effective as this process is, confronting the mess you’ve gotten yourself into is scary. You might even feel insecure or judged for your life choices. And if you let yourself get stuck here, paralysis will set in. Your cycle of debt will only continue.
Instead of letting that happen, take a deep breath, step back, and take a courageous look at how you got here. Then, move on. Don’t stay there! Set up your finances so your debt termination starts happening automatically regardless of how you feel about it. Because there’s no day like today to set yourself free from debt.
Community Question! What can you do today to get out of debt faster based on what you’ve learned today? We’re waiting to hear what you have to say in the Financial Foundations Community.
image credit: Bigstock/denisfilm
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.