*Survival Debt Elimination*
By: Sleeper
30 October 2004

What keeps the most people from developing wealth or an adequate retirement? Debt. If you could eliminate debt, you would have accomplished the single most important step toward positioning yourself for financial security.

If you had no debt, you could feel a greater degree of freedom and peace and live on a small portion of your paycheck. Indeed, you would have a lot more money for other preparations if all of your earnings were available to you! In addition to more and better preparations, you would be better able to prepare for times of financial crisis and, in the interim, give more to your church or other favorite charitable institutions. Lastly, it is important to note that safety of your family may depend upon your attention to your debt. It has been estimated that 89% of all divorces can be traced to quarrels and accusations over money.

Money is like fire. It can be a powerful servant, but a ruthless taskmaster. You either control your money or it controls you. Success has a way of passing by those who have not the discipline to handle it. Through our healthy respect for money, we can attract wealth. Those who understand compound interest, earn it. Those who do not, pay it. Compounding interest is your enemy. It robs you of your working funds.

I read an article online that demonstrates the power of compound interest. It comes from Tony Robbins and his story of compounding that talks about a wager on a golf course. Say that your golf partner suggested a small 10 cent bet per hole. You think, "Well, that means that only $1.80 is at stake." So, you agree. Then, he suggest that you double the bet on each subsequent hole. Here's how it would go, if your partner wins each of 18 holes: One the first hole you lose a dime. On the second, you lose twenty cents. When you add the dime from the first hole, you're down only 30 cents. Big deal! The third hole is worth forty cents, the fourth only 80 cents. Not too bad. Hole five is worth $1.60, sixth $3.20, seventh $6.40, eighth $12.80, and the ninth $25.60. When you add up your losses on the first nine, you realize you are down $51.11. Once you have finished your game, you will have lost what, maybe $150? Actually, because of compounding you will owe $19,660.80.

Now, even if your credit cards do not have interest rates that high, the principle is identical. If you pay only the minimum payments, you will pay them for years and years and many times the actual principle you spent in the first place. In order to eliminate this pattern, or spiral into financial ruin, you have to follow a number of steps.

Determine why you are in debt in the first place.

External reasons for debt are often merely excuses. Instead, look inside and determine why you went into debt in the first place. You will probably find, as I did, that it was primarily the need for instant gratification. Rather than saving, for furniture, cars, or vacations, you borrowed for them. This comes from a failure to distinguish between a need and a want. Survivalists (including myself) also seem to run into this. For instance, I have been known to talk myself into buying yet another pistol, when I already have five. I convinced myself that I "needed" a sixth pistol "for the bathroom out back" when I really just wanted another one. Debt can also be the result of the need to keep up appearances of a certain standard of living for friends or family. Lastly, the culprit could be impulse buying. I once heard a statistic that 90% of all purchases are unsatisfactory to the consumer. How does the consumer combat the unhappiness? Spend again. The cycle continues.

To stop the spiral into debt, you must search your heart and discuss the cause of your debt situation. If you have a spouse or child, you will need to discuss it with them as well. Perhaps they might be able to offer some insight into the cause of the debt situation.

After you have identified the internal cause, make a plan to conquer it.

Decide how you will reduce your spending enough to attack your debt. This is called a "budget." Some people think a budget robs them of their freedom. But really successful people have learned that a budget makes real economic freedom possible. It allows you to learn where the money is going and how to redirect it toward the priorities that you deem to be most important. It is not a pair of handcuffs. It is a tool that ensures that you spend your money on that which you believe is most important. The budget will help keep you from going deeper into debt. There are many free templates available on line that you can use to set up a spreadsheet to track where the money is going. Merely track the spending for the first couple of months. See where the money is going. Then reprioritize it so that it goes where YOU want it to go. Only after you have stopped this spiral into deeper debt can you reverse the trend.

Use the "Snowball Technique" for eliminating debt.

Your debt is a cancer. You developed a budget to contain the spreading. Now you can begin a plan to eradicate it. The "Snowball Technique" is like an invasive procedure to kill debt. It is very simple:

(1) Identify your smallest debt (debt one). Some people advocate paying off the debt with the highest interest rate, but I advocate taking the smallest debt. Paying the first small debt off quickly gives you a psychological boost.

(2) Pour every available cent each payday into paying down that debt while paying only the minimum on the other debts.

(3) Once you have paid off that first debt, identify the next smallest one (debt two)

(4) Add the amount you had been paying on debt one to the minimum of debt two, and pay that amount.

(5) Let the snowball grow with each debt you eliminate.

As you continue, your snowball will get huge, and your progress will seem to multiply. I recommend keeping a spreadsheet of your progress. Note the initial debt level somewhere on the sheet and subtract the current level. Watch the level decrease. It is psychologically satisfying.

Celebrate the successful elimination of debt along the way

This gives you a reason to continue and also keeps you from feeling deprived. Plan ahead how you will celebrate the successful elimination of each debt along the way. But don't celebrate in ways that would slow your progress. Some people want only to pay off their unsecured credit card debt. However, I would recommend that you keep going until the cars, house and everything else is paid off. Some people advocate keeping a mortgage and lien on vehicles to deter creditors from executing on them in the event you are sued. In many states these assets are exempt from judgment liens. Even if they are not, you can pay a lawyer to set up an estate plan to protect you from lawsuit happy judgment creditors and others who would try to take what you worked to hard to acquire.

Conclusion

Elimination of debt makes you free. You are less likely to have to stay at a job that you do not like. You can build wealth and supplies more rapidly. You are more mobile. As much as we prepare for the end of the world as we know it, we must also prepare to live in this world until it collapses. Debt elimination is a big step in the right direction.
Sleeper



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