We hear the mantra all of the time that debt is bad yet the majority of people live their lives believing they will always have bank payments. And this easy money through credit cards and automobile loans can get a lot of people into trouble.
Now, there are various levels of debt of course, and I am not going to cover situations where you are months or weeks from losing your home or filing bankruptcy.
What I will focus on is how to help those who are struggling financially or emotionally with debt to get their thoughts straight and headed in the right direction.
Here’s the deal, debt is something plaguing a lot of people and it can really wreck havoc on your quality of life. It contributes to sleep loss, it can destroy marriages and can be a catalyst for bad decisions.
So, it is my hope that we can get your mindset focused on the right things and adjust your cash flow to be in alignment with your priorities.
The truth is, most debt people carry such as auto loans, mortgages and student loans are simply a result of poor cash flow management.
It is not usually reckless choices that create this type of debt but rather people simply following the status quo of borrowing for big-ticket items.
But following this flawed logic often creates a trap or cycle of continuously relying on banks to fulfill your cash flow needs.
It is why I explain in my blogs, books, podcasts and other videos that is all starts with tracking money movement. We have to be tracking our money and have a spending plan in order to gain control over it.
It’s all about cash flow!
There are many software programs out there such as quicken or mint that you can use to track expenses and monitor your cash flow.
To get to this point it is helpful if you break your spending down into 3 different categories to begin to departmentalize your money needs.
The first is where most people operate and that is the area of reoccurring expenses.
This would include things such as a house payment, utilities, the things that you likely know off the top of your head since they are the most frequently paid expenses.
Then you have those irregular expenses. These are things that pop up throughout the year. Personal property taxes are an example, maybe an associate due, real estate taxes, and things like that.
So, you have your regular expenses and you have your irregular expenses and now you have what’s left, which is normally used as discretionary or money simply left to sit in a bank account. People will often call this their savings but they really have no defined plan around the money.
Now this is where you have an opportunity to begin shifting things into your control. When you take your budgeting process a step further and think beyond your current situation to identify very specifically your spending goals over the next 36-48 months, you begin to see a bigger picture.
The reality is that you will have car purchases, perhaps home improvement, educational expenses, all these different types of things. We know this is in our future and it is essential to identify and map them out.
It is important to identify how much money you will need and when will you need it, because if these things are not mapped out then you will end up relying on banks to subsidize your lifestyle.
Look, I know many people boast about monthly budgets, but the truth is they do not work. There are too many variables to a month to month budget that prevent them from being an effective tool for building wealth. They may help you get by month to month but I know you want more for yourself.
Looking at a bigger picture gives a better sense for what is actually happening and can then be converted to a monthly structure to help manage things on an ongoing basis.
The bottom line is this. Money is either flowing toward you or away from you. If money is flowing toward you, you have control. If money is flowing away from you, you are giving up control.
If we want to control the flow of your money we have to be deliberate with how you do things and create a proper structure around your accounts.
So, once you have everything mapped out correctly and have identified current and future cash needs, the next step in this process is to identify areas for improvement.
We want to decrease the amount of cash flowing away from you and into banks by simply removing the expense or restructuring debt to reduce payments.
You may not realize it but some loans may be requiring too much of your monthly resources and should be restructured to give control of those dollars back to you.
A strategy we use to determine if a loan is in your favor or if it favors the bank is to divide the balance you owe by the minimum monthly payment and if that number is lower than 50, then we would consider this a bad loan. If the number is between 50 and 100, we would consider this suspect, and if it is over 100, then we would consider this a good loan.
So, the first place to start is to itemize your current debt balances and minimum payments. Then by using the formula explained above, you can identify the loans that need your attention.
Once you have this information written out, the next step is to begin to figure out what options you have for restructuring the debt determined to be a bad loan.
You do this by itemizing all of your resources such as cash on hand, investments, life insurance cash values and home equity. You will also want to include how much money you are adding to these accounts each month.
A note on the home equity, if you take the value of your home and multiply that amount by 80% and then subtract your current mortgage amount, you come up with your homes available equity. If you have a positive number, this is equity you can use to help eliminate your debt.
You will likely see that refinancing a home to use home equity is going to be the best scoring option using our formula.
Sometimes refinancing a vehicle can free up some money to consolidate other balances and can reduce payments.
Renegotiating student loans can work if you stretch the balance out and focus on keeping required payments as low as possible.
A banking strategy using whole life insurance can work in some cases where there is cash on hand enabling us to use the provisions of the policy to consolidate debt and control payments.
Unfortunately, there are circumstances where there is no room for changes such as if you are maxed out on credit with little if any resources. In this scenario, your best bet is to focus on a debt snowball system where you pay above the minimum payment on the smallest balances first while paying minimum payments on the other balances. When a debt is paid off you use that payment for paying down the next smallest balance and so on.
Every situation is different and you may benefit from using some or all of these strategies. Just keep the big picture in mind…this is not just about paying off debt; it is about creating a lifestyle of building wealth and not relying on banks. This requires thinking differently about what purchases you make and how you make them.
If you have questions about what you read today let me know. I work with a lot of people who are restructuring their cashflow and assets to reduce debt and build wealth.
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