Let’s talk a couple minutes about getting our finances under control. I know it’s not possible but it has to be addressed. A huge part of financial freedom is the elimination of overhead. We are talking about reducing debt. What I am about to show you is one of the most important things you could ever learn about your personal finances. Dave Ramsey calls it the “Debt Snowball.” Look at the bottom look at the attached diagram. Here’s what we’ve got. In the first column, we will see the different people or businesses that we owe. In the second column you will find the amount that is owed. We owe $450 to Sears, $650 to Macy’s, $1,600 to our parents, and so on. In the third column, you will see the minimum payment, the very lowest amount that we are allowed to pay to eliminate this debt.
What are we going to do? What I am about to show you will change your life forever. Here is what’s going to happen. You’re going to find an extra $200 a month. Now, you may say, “Where in the world will I find an extra two hundred dollars?” Good question. I don’t know, but you will find it. You will get very, very creative. If you have to take a second part-time job, you will do that. If you will eliminate cable TV or a cell phone, or stop drinking expensive drinks, or whatever, you will find $200 a month, and what you will do with that $200 will change future generations.
Here’s how it will play out. Let’s start with Sears. We owe them $450. Your minimum payment is $50. You will pay them $50 and add to it the $200 that we just found, totaling $250, and within a matter of only a couple of months, Sears is gone. Bye, bye, Sears. We’ll never have to worry about that again. Now, we are going to let the money start to snowball away the debt. What are we going to do? Let’s attack Macy’s. Macy’s, we owe $30 a month. We are going to take the $30 and add to it $250 a month. Now, where did that $250 come from? You remember? We just freed up $250 a month because we paid off Sears. We are going to take that $250 and the $30, and together, we’ve got $280, and guess what? In just a matter of a couple of months, Macy’s is gone as well, and the snowball is getting bigger. Let’s take our parents. We are paying them $200 a month. We will add to it the $280 that we freed up, because we no longer have to pay Macy’s or Sears, and now, we’ve got $480 a month going to pay off mom and dad. Again, a matter of a few short months, and mom and dad are paid for. Then, we are going to take this money that grows each and every month and apply it to the next debt that we owe, starting with the smallest amount of debt, so we can knock it out, and going piece by piece down to the largest. We are going to let the debt snowball, completely wipe out everything that we owe but the house.
Now, how will that benefit you in the long run? Let me show you something that’s really, really fun. If you just continue to pay minimum payments, like so many people do, it is going to take you 120 months to pay off your debt. That’s 10 years before you pay off all this debt. That’s assuming you don’t take on any more. Now, watch this. If you do the debt snowball, your payoff time is not 120 months, but instead, 21 months. That’s a difference of 99 months of not paying any debt. Now, buckle your seatbelt and get ready for this. If you take $1,110 … now, where did we get $1,110? If you will look at the debt that you just paid off, you freed up $1,110 a month in debt payments that you no longer have. If you take that money and you invest it at 12% for that same 99 months that you would have been paying on your debt, at the end of that time period, you will have $186,569.86. In most parts of the country, that’s a house, paid for in cash, totally debt free. You can do it.
Here’s Linda’s story. As a widow she was $66,000 in debt six years ago. This week she paid her last payment on the $66,000. She is debt free.