How to Get Out of Debt AND Stay There
If you are or have ever been in debt, you know how it can drain you emotionally and financially.
From that standpoint, it’s no surprise almost everyone wants to escape debt as quickly as possible. But debt can be like diets: The yoyo-effect often catches those who try to get results too quickly.
Once you’re out of debt, you want to stay debt-free, not feel good for a few weeks until you reluctantly swipe your credit card again.
In this episode, you’ll find out how to get out of debt sustainably and stay debt-free for the rest of your life. Ready to develop a strategy that suits you instead of running with cookie-cutter solutions that don’t work for you?
Show highlights include:
- Why debt doesn’t have to be bad. ([3:21])
- The first question you should ask yourself after deciding you want to pay off your debt. ([4:33])
- Why escaping debt can be so hard—and how to break the negative momentum of accumulating interest and get your finances into an upward spiral that makes you wealthy. ([14:42])
- 3 hands-on strategies to pay off your debt. These aren’t abstract models—you could start right after listening to this episode! ([16:22])
Remember to download Grandma’s Top Tips for an Independent Financial Future by dropping into http://www.grandmaswealth.com. Time-honored wealth strategies served with a helping of balance and trust.
If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting https://www.grandmaswealthwisdom.com/call…just like Grandma would want us to do.
Links mentioned in the show:
Find the infographic for the Snow-BANK™️ Method here: https://nyafinancialpodcast.com/wp-content/uploads/2019/02/SnowBANK-Method.png
Attend the live show: https://bit.ly/livenyafp
A hearty welcome to Grandma’s Wealth Wisdom with your hospitable hosts, Brandon and Amanda Neely. This is the only podcast for strategies to grow your wealth simply and sustainably like grandma used to. Without further ado here are your hosts.
Amanda: Hi, I'm Amanda and welcome to Grandma's Wealth Wisdom where we help you break through to a smart, stable financial future with the tried and true wisdom that grandma used.
Brandon: Hey, and I'm Brandon. Welcome to a new decade. We are now officially in 2020. This is crazy, we're now in a new decade, this is, I don't know, just mind blowing. This is Episode 45, and of course, as you can tell, we're hitting the airways on January 3rd of 2020, and we're kicking off this year with an episode with one of grandma's favorite things to talk about, debt. [0:01:11.4]
Or maybe I should say this year and this decade, and maybe thinking differently about how we think about debt. Why are we talking about debt now anyway? I mean we just went through the Christmas season and all that, and here's a reason. Because a lot of people are facing the music and deciding to deal with debt now that Christmas is over, whether it be from the holidays that we just went through or from many years past from the college to cars to old bad decision that we made financially. I want you to put that in the past, put that into last decade and now think in a new way about how to deal with debt. Now, debt might be the true ghost of Christmas past. Debt might be that scary ghost of Christmas past and I want you to leave that there in the past. [0:02:16.8]
Amanda: Now, we've talked about debt before on this podcast, we encourage you to go back and listen to Episode 35 where we interviewed Tim Austin, and he talked about the eight lessons from grandma's generation, that was part two of our interview with him, so look for the one titled "Eight Lessons from Grandma's Generation", Episode 35 that aired in August 2019. One of the lessons that he shared from these eight lessons from grandma's generation, the greatest generation, is this, "Use debt wisely." He didn't say get out of debt, he didn't say debt is the enemy, he said, "Use debt wisely." So today we're really going to dig into this question, what does "use debt wisely" mean exactly. [0:03:08.2]
Brandon: Lots of people have lots of different opinions about debt, and you might even have a picture of them when I share this little sentence. Some people won't ever be in debt. Not even to themselves. Debt in itself is bad. So there's those people that no debt, no whatsoever, and not even to themselves, that's their stance. Now some people see leveraging debt as the only way you'll ever be wealthy. Some people see leveraging debt as the only way you'll ever be wealthy, and there's all kind of variations in between. So how would grandma use that wisely? We're going to get there, but first let's ask some of her priorities, or our priorities. [0:04:08.3]
Amanda: Right. So grandma wants you to get back to your own priorities and what's important to you. We'll talk about this many times in this episode, that blanket statements are not true financial wisdom. Right? You want to take things and apply them to yourself, so we're going to help you ask some questions to decide what's most important for you and then you can help think about how you would move forward. So let's say you've decided you want to get out of debt, that is a priority. You're listening to an episode "How to Get Out of Debt and Stay There", so we're going to kind of, we're going to assume that that's true, that you want to get out of debt. The first question starts by asking you what's most important to you? A, to pay off your debt as quickly as you can, or B, to adopt a financial strategy that maybe pays off your debt a little more slowly because the strategy helps make sure you won't go back into debt later. You know, would you rather, A, get out of debt as quickly as possible, or B, go more slowly but never go back into debt again. And you kind of do you have to make a choice which one is more important. [0:05:16.4]
Brandon: Yeah. I was working with the clients, this is about nine months ago or so, and she was telling me how she was actually on the Dave Ramsey Show screaming, "I'm debt free."
Amanda: You've got to do it like this, "I'm debt free." Like that.
Brandon: There you go. She yelled, "I'm debt free." and then later she ended up back in the debt because of college and some emergencies and some other things that happened, that she was back in debt, and then talking with me trying to figure out a strategy. So she was actually on the show and went back into to figuring out how do I deal with this debt. [0:06:02.2]
Amanda: Right. It is exciting to pay off debt, there's this human, emotional, psychological response when you're being super serious and throwing lots of money out your debt each month and you're seeing that balance dwindle and the interest charges get lower and lower, it's fun, it can be a game, you can really get into it and lose yourself in that process in a really cool, fun way, and that taps into a part of like our who we are as human beings for a lot of people. And it's kind of like you're in a tunnel and you see this light at the end of the tunnel, this debt free light and you can feel the high as the train that you're on goes faster and faster toward that light, because the more your debt goes down the more money you put toward it goes to the principal and you're getting faster and faster toward the end of that tunnel, and that's super exciting, you're like, "I can almost see the light of day." [0:07:00.1]
Brandon: I feel like I want to be on that train, sounds exciting.
Brandon: But then the challenges you get out of that and then you only go back into the tunnel, because guess what, life happens, things happen that cause us to need, I don't know, money, it's one of those things we actually need to survive, pay bills, whatever. And that's what happened to my client, she ended up back into that dark tunnel and trying to figure out how do I get out again and that was a hard thing for her.
Amanda: Yeah. Think about it this way. I mean we all want to throw a student loan burning party. You know, we paid off our loans, you can burn all that paperwork that's sitting in a big pile or in our filing cabinet or whatever it is, but once we throw that party, we burned the paperwork, we probably wouldn't go get another six figure student loan just after we finished paying off the last one. We wouldn't choose that, right?
Brandon: Wait at least a few months hopefully. [0:08:04.5]
Amanda: Maybe. But there are other types of debt, right, student loan is not the only type of debt. Car loans are a big one that people cycle through, and lots of people pay off their car loan and end up needing a new car before they saved up enough to buy the next one, or they need a new car before they've even paid off their last car loan, and so they're constantly always in debt on their cars, and they just go from one car loan to the next car loan. So that kind of shows you, they get out of one tunnel, they go onto the next tunnel. Maybe they never leave the tunnel is kind of a way to think about it that way.
Brandon: That's a lot of people, actually. So what if instead of focusing on paying off the debt as quickly as possible you shifted your focus more towards building your net worth.
Amanda: What if you paid your minimum on the car loan, but instead of dumping extra on top of your car payment you put that extra aside for a number of years so that you could pay cash for the car the next time you needed it, and then you saved up for the next car, and you kept saving for your cars rather than paying back loans on your cars. [0:09:19.0]
Or what if you paid the minimums on your student loans and then set aside anything extra to build a nest egg for emergencies. These kind of what if questions we're going to get to some practical examples, but we talked about the student loan burning party, when you're thinking this way about your net worth something else happens.
Brandon: Yeah, we possibly could have a "my net worth just reached an all time high" party, that would be awesome whenever we reach a certain number, then we go to the next one. But if your net worth keeps growing you're going to have a party almost every day, it sounds like. [0:10:00.5]
Amanda: Yeah. And if we did this kind of thing where we threw "my net worth just reached an all time high" party, grandma revolutionaries everywhere would seriously be partying every day.
Brandon: So this brings us to the importance of an emergency fund and having strategic financial strategies, like budgeting your true expenses.
Amanda: So this is where we get to the practical examples. So both of these examples are going to use Jo and Alex.
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Amanda: Jo and Alex are very much the same. Jo and Alex both have $10,000 in debt, also Jo and Alex are going to have a family emergency and six months, but of course they don't know it yet. We know it because we're telling the story, but it's happening. And they each have an extra $400 per month.
Brandon: I have a question, just before that.
Brandon: If you knew an emergency was coming in the future, knowing like, "Hey, there's going to emergency coming." would you do something different with your money knowing six months from now I'm going to have an emergency? Like we don't know that, but would you do something different?
Amanda: That's an interesting question, we should maybe do an episode about that. Okay, but here's Jo and Alex. So Jo takes the strategy of paying off debt as quickly as possible, so she throws that extra $400 a month directly toward the debt, above and beyond any minimums that she's paying. [0:12:05.5]
Alex decides to set the $400 per month into an account that will grow his money and buy more of the loan interest on the student loans and he continues just paying his minimums and he puts the $400 aside. Now what happens when the family emergency hits six months later?
Brandon: So Jo can't get any money back from the student loan company. I don't know about you, have you ever tried to get extra interest paid from the loan company? Like they're not going to give it to you. So she is abusing a credit card at a super high interest rate to get through that emergency, which kind of sucks, because then she went backwards. Alex has been setting aside $400 a month for six months, so he has $2400 plus interest to help weather that storm.
Amanda: So who ends up in a better position? We'll let you decide. Let's take another example though. [0:13:04.7]
Let's say Jo watches her spending and makes sure every dollar not spent in a month is applied toward her debt. So you know, gets to the end of the month, there's a little bit left over, she just automatically transfers that to pay off a debt, or you know, go extra on the debt. And let's say Alex, on the other hand, takes what's left at the end of the month and leaves it to accumulate, sets it aside maybe in a savings account or a savings type vehicle and just let it accumulate. Now what happens when the semiannual car insurance payment comes or the holidays come around or it's time for new glasses or time to visit the dentist or whatever it might be?
Brandon: So Joe has to scramble to come up with the funds and ends up carrying some credit card debt when the funds aren't available, so it's a cycle. Alex has the money just sitting in savings vehicle ready to be deployed. There's no going backwards for Alex. [0:14:05.6]
We'll let you decide which one is better again, and we'll remind you here that each person's story is unique. You're not going to be exactly like Jo, you know you could be exactly like Alex, you might not even be like the average American or maybe you are. The average American has to send off over 30% of their income as debt repayments each month. It's like you get your paycheck and a third of it is gone to paying off debt. I mean that's how the average American lives, and that doesn't leave a lot of room to build up an emergency fund or to embrace these true expenses, and that's, you know, part of why people go further into debt, rather than moving out of that tunnel. And of course, there are all kinds of factors to consider like interest rates, how frequently that interest is compounding on your loans, what type of loans you have, and everyone's going to have a unique situation with those. [0:15:02.6]
Brandon: So there are three common ways people consider paying off debt. Now these are not blanket statements. Now, again, I want to say that again, these are not blanket statements, even if you listen to financial podcasts or other things, all these ideas are blanket statements, and I don't know, it's just, it's not a blanket statement. You want to make sure whatever strategy you choose really does work for you, not just theoretically for somebody else or in general, does this work for you.
Amanda: Yeah. So there's three different strategies that we're going to look into and we're working on a calculator with our good friend Mark Willis, host of the Not Your Average Financial Podcast to develop this calculator that's going to show you in real dollars what it would look like to pay off your debt using these three methods that are very common, so then you can choose which one works best for you and your particular situation. and maybe it could even be a combination of the three, they can work really well in conjunction with each other, again, depending on what kinds of debt you have and how those word. Brandon, give us the first two and I'll go into more depth about the third one. [0:16:21.2]
Brandon: Cool. So the first one is the snowball method. This is popularized by Dave Ramsey where you pay off your debts smallest to largest. You pay off your smallest debt first, and then roll what you're paying towards that debt to the next smallest debt, and then the next one, and the next one, so then it eventually end. I mean again, the snowball method, it builds onto each other and you have a bigger snowball at the end. The second one is the snow avalanche method. Now that's I'm alert to the snowball method, but has you pay off your high interest first. [0:17:01.4]
Now that might seem a little slower depending on what the interest rate is and how big of a loan that is. So the snow avalanche method is paying off the high interest first, and then rolling that over to the next highest and the next highest, and it goes faster from there. The third one, Amanda, is?
Amanda: The snow bank method, which has coined and then trademarked by Mark himself that we're doing the calculator with, and it has five steps. We're going to go through these five steps, but also in the show notes there will be an info graphic that outlines these five steps, it's a pretty cool tool that Mark and his team put together. So here's the five steps of the snowbank method. Step one is you pay your minimums on your debt. You just got to pay your creditors what they tell you have to pay them, you just pay those minimums. Step two, you start building wealth right away by putting extra money into your snow bank. [0:18:06.2]
So anything above and beyond your minimums you are going to put into your snow bank. Now what is a snow bank? A snow bank is the specially designed high early cash value dividend paying whole life insurance policy, or what we like to call around here grandma's strategy for short. Grandma strategy or your snow bank. And basically what's going to happen is that your wealth is going to start accumulating there in your snow bank, and then you get to step three, use the wealth that's built up in your grandma's strategy or snow bank to pay off your debt using what's called a "policy loan". Doing air quotes there, "policy loan". So now you've taken the wealth in your snow bank and you've paid off your loan, and so you are debt free to outside creditors. But you have this policy loan, you've used some of your wealth. [0:19:03.9]
That's where step four comes into play. This is going to sound too good to be true, but it's true, your wealth, that cash that you used to pay off your loans, they continue to grow inside grandma's policy as if you never used it, as if you never touched it. And this is really the secret sauce that's not so secret, because grandmas, you know, half of grandmas in the greatest generation used this strategy. Right? So it's the secret sauce, it's not so secret, but this is why the snowbank method works so effectively, is because you don't lose a dime of the growth on your money, even while you've used it to pay off your debt. And it totally sounds too good to be true, but we have real life proof, I mean literally we used the snowbank method to pay off our student loans and to get through some emergencies and we haven't lost a dime, and we've actually gotten a little more growth than we anticipated within our grandma strategy. [0:20:02.0]
Brandon: I think it's we're building in tracking our net worth as opposed to the other side of things, it's really fun to watch and have these net worth parties all the time every day.
Amanda: We don't really have a net worth party, but it does make our budget meetings more fun. Then step five is you do have this policy loan, so you pay yourself back and you can also start a second policy with the money that you are saving in your grandma strategy, in your snow bank for your future, all the different things that that could be used for. Now, we're going to do a live show with Mark and the Not Your Average Financial Podcast on February 1st and we're going to debut this calculator, we're going to do some Q&A about the snowbank method, and you can reserve your spot for this live show. You have to actually go reserve your spot so you get the link for where to join us, and the website to do that is bit.ly site, so bit.ly/LiveNYAFP for Not Your Average Financial Podcast. We'll put that link in the show notes too so you don't have to type all that in. So bit.ly/LiveNYAFP. [0:21:20.8]
Brandon: Now again, this is going to be a super fun live show, so join us on that, and if you go to our show notes you can find that link as well, click on there. Now one question we will most likely be exploring on the live show is a common one, and this question is is there such a thing as good debt, is there anything like good debt. Like business debt, mortgages, is all debt bad is something that we want to explore.
Amanda: I know Brandon really loves to talk about that question, but I'm not going to let him talk about it today, join us for the live show and we'll talk about it there, or of course, if you can't wait till February 1st schedule on our calendars at GrandmasWealthWisdom.com. But for today we should totally wrap up. [0:22:10.8]
Brandon: So to recap for today, grandma likes the idea of getting out of debt, but she wants you to be able to stay out of debt too. We have three questions to ask yourself. Perhaps ask yourself these questions in this order as you're approaching your financial goals for 2020.
Amanda: Yeah, so start with this first question, how much of an emergency fund do you need to withstand an emergency and not go into debt? Remember, in the Great Recession more than a few people were out of debt for two years or so. I mean do you need an emergency fund like that. Or say your family lives far away, what would travel cost to get back to them in a hurry for a family emergency, and you would be off work for a while, like how much you need to help cover those things as well in that kind of case. [0:23:05.3]
So it's a first question, how much of an emergency fund do you need to withstand an emergency and not go into debt.
Brandon: And I would add that only you can answer that, so by figuring that out only you can answer what that emergency fund would be. Now the second one is what would you need to do to embrace your true expenses so that an annual or semiannual expense doesn't sneak up and surprise you. Gor example, how much did you spend on the holidays and 2019? Could you divide that by 12 and set that aside throughout the year in 2020? Because again, Christmas is going to come in 2021 and 2022 and all that. And what about summer vacations? Home owner's or car insurance? Back to school clothes, oil changes, dentist visits and so on and so forth? Embrace those true expenses. [0:24:01.9]
Amanda: And most importantly, after you've decided how much of an emergency fund you want to need and you've embraced your true expenses, now you're ready to ask the question how much opportunity cost are you sacrificing each time you pay a dollar, even a dollar above your loan minimums, rather than putting it toward a financial strategy that still allows you to pay off your debt without breaking the power of compound interest. You know people talk about the opportunity cost of buying a latte, or of, you know, going out to dinner, that kind of thing. There's even a book called The Latte Factor, which is on my reading list. I think that's a powerful way to think about the world, but what about the opportunity cost of paying extra on your loans, how much more could that money have grown to if you were able to put it somewhere where you can still use it to pay off your debt, but you don't break the power of compound interest? That's a question that we explore a lot with people and that is the really the power behind the snowbank method. [0:25:09.8]
Brandon: We'd love to talk through those questions with you if you'd like. So again, everybody's different, so schedule a call with us at GrandmasWealthWisdom.com, and don't forget to register for the live show with the Not Your Average Financial Podcast at bit.ly/LiveNYAFP.
Amanda: And be sure that you catch our next episode titled What Is an Independent Financial Future Anyway. If you want financial independence, the first step is getting clear and specific on what that means for you, so hit the subscribe button so you don't miss that episode about how to set your money goals.
Brandon: Until next time, keep building your wealth simply and sustainably so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters place consult a professional who knows your specific situation.
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