3 Things You Should Do BEFORE You Start Paying Off Debt
If you’ve decided to build up your personal wealth, eliminating your liabilities or paying off debt are essential. But before you start the massive undertaking of tackling your mountain of debt, consider preparing for the journey.
Paying off debt is not the easiest task, but it is an essential one to acquire personal wealth and keep on building that wealth.
Turning liabilities into assets is a key to personal wealth, but to avoid going back into debt once you begin, you’ll need to take a few small preparation steps.
STEP 1: Strategic Reserve (Emergency Fund)
The first thing you will want to do is build up an emergency fund. This fund should be liquid and easily accessible in case of an immediate need, such as a medical emergency.
Consider your needs as a family when deciding how much you will need to have in a savings account for a rainy day. Some say $1,000 is enough, but I personally think that if you have a family of four, beginning with $5,000 is a lot safer and offers much more security.
STEP 2: PLAN Ahead (Create a Budget)
The next step is learning to live on less in order to save that money.
You will need to quit using all forms of credit, including your credit cards. Self-made multi-billionaire Mark Cuban said, “if you use credit cards, you don’t want to be rich.” So just stop.
This seems incredibly difficult when you’re also trying to save, but it can be done by getting a written budget in place. A budget tells your money where to go, making it work FOR YOU.
When you get your budget written out, you’ll be able to see where you are wasting the money you’ve worked for. Simply understanding the places you can cut back will put your money to work for you as you head toward financial freedom.
Choosing to be “odd” for only a few years (or less, depending on how deep you cut) and controlling yourself is the key to reducing liabilities, and thereby increasing wealth. Can you live without cable? What about that new pair of jeans an Instagram model is pushing?
The greater you cut back, the faster you’ll be able to save up an emergency fund and begin paying off the liabilities that are stealing your wealth.
STEP 3: Sell Things
The third step is optional but should be considered: sell anything you aren’t using.
Making that little bit of extra money to put into your emergency fund will get you to the actual debt repayment journey sooner. Most Americans are used to spending money frivolously and not saving enough, as this is the new normal. Selling some of those things you don’t even use could help give you a financial boost when paying off debt.
When you start paying off debt, choose a path but be willing to change it if circumstances change. There are advantages and disadvantages to the many ways one can go about paying off their consumer debts.
The debt snowball offers instant gratification and may keep you motivated longer, while the debt avalanche will save you money in the long run, especially if you have a high interest rate on some of your loans. You could also create your own method and just list which debts you’d like to see gone first.
Once you’ve got plans in place and feel secure, it’s time to start eliminating those liabilities so you can grow your personal wealth!
Wealth Strategist, FutureMoneyTrends.com
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