According to Debt.org, the average non-mortgage debt for 30-49 years old is about $27,000. That means not counting your mortgage, one American between the ages of 30-49 on average carries about $27,000 in credit cards, student loans, HELOCs, medical, and any other consumer debt. Going further into debt will only cause more stress and less cash. Our mindset at Builders Wealth is cash is King. The sooner you can pay off your debt, the sooner you will acquire wealth. Not to mention, your life will become less stressful when you are debt free. No one can take your home or car because you own them.
Getting out of Debt
In our opinion, the Debt Snowball is the best way to become debt free. The debt snowball is when you create a list of all debts by amount and not worry about interest rates. You then put all amounts in order from least to greatest amount. You then pay the minimums on every loan and put the rest of your money on the first loan, which is the least amount. You continue this process until you are DEBT FREE!
Even though the Debt snowball isn’t the way that makes mathematical sense, it makes psychological sense. You must take the human factor into the consistency needed to pay off debt. Even though you will pay a little more in interest, you are more likely to stick with the debt snowball method because you see results quickly. Check out the example below.
The above example shows common debts listed smallest to largest by interest rate. If you were to pay the minimum on everything and put everything else to the truck, it will seem like you aren’t making any progress. Then once you pay the truck off, you are onto your mortgage which can be very daunting.
The best way to pay off debt is to be consistent. Consistency is easier if you see results. Starting with the $2,000 credit card and getting that paid off quickly will help give you momentum to pay off the HELOC. Once the HELOC is paid for, then you have $250 extra that you can add to your truck payment. Once it’s just the mortgage left, you will have an extra $550 to put to it. By putting $550 extra, the 30-year mortgage just turned to a 15 year. That’s $130,000 just in interest saved on the mortgage!
Final Thoughts
Realistically, everyone will have to take a loan out on many high-priced items like a house or a car. But understanding the terms of a loan and working backwards to know how much you can borrow will help you make the best decision. Do not get caught up in keeping up with your neighbors. Your neighbors are broke! Be different, have no debt and a lot of cash. This mindset of using cash to buy your freedom is empowering when so many Americans are bound by debt. Imagine how you will sleep in your paid-for house in your paid-for bed. Imagine driving your paid for used truck or being able to pay for your kids’ college by writing a check. These are all extremely attainable if you put in the work and have the right mindset.