In my previous post, I explored some of the reasons that people don’t or can’t get out of debt. Primary among these was that many people don’t have a strategy for paying down debt. Remember that your purpose in paying off debt is to free up cash flow that you can then use to invest into independent income vehicles for the 5 Day Weekend lifestyle.
With that in mind, here’s the fastest, safest, and most sustainable way to become debt-free: build savings first, restructure your loans, use the Cash Flow Index and be cautious about locking money into an asset. I look at the first two here, and the second two in my next post.
1. Build Savings First
It doesn’t make any sense to start paying extra on loans until you have at least three months of income, and ideally six months, in a liquid savings account. This creates safety.
If you have no cash reserves, what happens when you pay down your loans but then experience an unexpected cash flow crunch? You simply increase your loan balances again or even worse, miss payments and hurt your credit score, therefore getting charged more for future loans.
2. Restructure Your Loans
You can restructure your loans by rolling short-term, high-interest loans into long-term, low-interest, tax-deductible loans. The 5 Day Weekend goal here is to minimize your payments and maximize your cash flow.
For example, if you have enough home equity, you can refinance your mortgage, which can be a tax-deductible loan, and roll as much of your non-deductible loans (credit cards, auto, etc.) into it as possible. This will typically lower your minimum monthly loan payments, and the tax deduction will also increase yourcash flow. Then you can attack your remaining loans strategically, using your increased cash flow to eliminate one loan at a time.
In my next post, I talk about the third and fourth steps for this get-out-of-debt strategy: the third is Cash Flow Index, a remarkable tool that can truly give you insights into your spending. And the fourth is being cautious about locking money into an asset: which can tie you down.
I’d love to hear from you: do you feel you’re at a point where you can build your savings? What steps are you taking to do that? Thank you for sharing.
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