Episode Transcript
[00:00:00] Speaker A: It's Take Control Tuesday. That means Mansa Musa is on the phone. And Mansa, we've been on this series about being in debt and ways to maneuver out of debt. And today you have four ways to get out of debt.
[00:00:14] Speaker B: Yeah, there's four strategies for getting out of debt we want to talk about today. But before we talk about getting out of debt, let's define what debt really is.
And that is debt is future disposable income already committed to past spending. That's why carrying debt feels heavy, because your future flexibility is already spoken for before you even get paid. Right, right. I gotta pay this, I gotta pay that. So getting out of debt isn't just about balances and interest rates. It's about reclaiming control over your future disposable income and reducing your level of stress from. For any debt reduction strategy to work, you need three things. First of all, you need some disposable income left over after living expenses. Say it another way, you need some money to do this.
You need the discipline to stay current on your current minimum monthly expenses. And the third thing is you need a small but steady contribution to an emergency fund. And that matters because the first time life happens to you while you're on this plan, you don't want to have to go back to the credit cards to solve the problem.
Now let's talk about how you do this. First thing you do is you figure out your debt service budget. And what that is is you add up all the required minimum payments, credit cards, card notes, student loans, personal loans. That's your baseline. The next thing that you do, you have to calculate your disposable income. So you take your take home, pay and subtract your living cost, your rent, your mortgage, utilities, food, transportation, insurance, child care, that kind of thing. Okay, now hopefully when you do that, you've got money left over if you're running a negative cash flow every month. In other words, it costs you more to live than you're making. That's the topic for another episode. So what you now must do is decide how much of that money you're going to apply to debt service.
Your budget is, whatever your minimums add up to be, plus your extra. Okay, let's say all your credit card, all your bills and all those things add up to $1,000 a month. Whatever extra you gonna put on top of that thousand.
So here are the four strategies. Number one is the snowball effect.
What you want to do is list all of your debts from the highest to the lowest and start paying on the lowest debt first.
Now what I mean by that is you're going to make minimum payments on all your other debt and whatever money is left over, that lump sum or whatever it was, you're going to pay that on your smallest debt and you're going to keep doing that until it's paid off. Because it's your smallest debt, that should happen relatively quickly.
[00:03:34] Speaker A: Right.
[00:03:34] Speaker B: Which gives you a great psychological boost.
Now once you've paid that debt off, whatever you were paying on it, that is its minimum plus the extra, you now take that and pay that on the next lowest remaining debt.
[00:03:52] Speaker A: Okay.
[00:03:52] Speaker B: So if you paid off a $500 debt and now you have a 750 debt, you take the $500 debt payment and add it to what you were already paying on the $700 debt. That's what creates the momentum.
[00:04:08] Speaker A: Yeah.
[00:04:09] Speaker B: When you pay off the second debt to take that amount, which was from the first debt and now the second debt, and add it to the minimum payment you were making on the third debt.
[00:04:20] Speaker A: Wow.
[00:04:20] Speaker B: And that's how it snowballs.
Now the next method is called the avalanche method. And by that is you take your debts, you list them by interest rate from the highest to the lowest and you start paying on the highest interest rate balance first.
Over time, this means you will pay less in interest. As you get rid of higher interest rate debt first, you don't get the quick psychological benefits that you do of the snowball effect.
The third method is the windfall method. And all this is is making a quality decision beforehand that any extra money you get will not go to a lifestyle creepy, but will pay down debt.
[00:05:06] Speaker A: Okay.
[00:05:07] Speaker B: And the final method is the hybrid method, which is just the previous three. And you use them as you need to as life presents different alternatives to you. So the best strategy isn't a perfect one. Randy is the one that you can stay with. Yeah. Without falling back into debt.
[00:05:27] Speaker A: Absolutely. Those are all such great strategies. And we'll make sure we put the whole thing on on our website at takecontroltuesday. Com. And Manta, as always, thank you so much.
[00:05:39] Speaker B: Thank you.
