Everybody likes to think they’re “real people,” but with roughly 74% of America living at the middle-middle class level or below, the masses are the people with the least amount of money.
So why do so many sites publish financial advice written by the wealthy, for the wealthy? They don’t need it.
Instead, we’re going to focus on giving real financial advice for real people; tips and tricks aimed at the true Americans who work for a living and are hoping to get even a little bit ahead.
(We would like to give you advice on how to get rich, but the fact is that most rich people became so by either being monstrously horrible people, doing incredibly illegal things, or through sheer dumb luck, and we’re not going to advocate for any of those things)
We’ve previously talked about the popular advice to pay yourself first, but this advice assumes that you’re making enough money that you can, effectively, take a 10% pay cut so you can stash that money elsewhere (e.g. for retirement).
The problem with such advice, first, is that it comes from people (and is aimed at people) who can afford to take a 10% pay cut. If you’re reading articles like this one and looking for financial advice, chances are you can’t afford a 10% pay cut. We’ll admit, it’s sound advice, in theory, and nobody wants to work right up until they die, but it seems counterproductive – why would you want to be miserable now so you can have a miserable future? Why not make the most of your time and money now so you have a better future?
A big part of being happy now and in the future is being debt-free.
If you’re one of the nearly 64% of Americans who own their own home, being entirely debt-free is going to take a long time. It’s possible to do it before that 30 year mortgage comes to term, but for this article we’re going to focus simply on paying off credit cards, medical bills, short-term loans, and the like.
(Besides, mortgages are considered good loans by credit agencies – they look good on your credit report – so you shouldn’t worry too much about paying it off anyway)
Pay off one thing first, then use the spare funds to pay off higher balances. We recommend paying off your lowest balance first, which will lower your total number of open accounts and improve your credit score.
Let’s say you have three outstanding debts – two credit cards and a car loan.
- Credit card 1: $3,000
- Credit card 2: $1,500
- Car loan: $5,000
We’ll say your minimum monthly payments for each are:
- Credit card 1: $75
- Credit card 2: $25
- Car loan: $125
If we do the math it looks like this:
Credit card 1: 3,000 divided by 75/month = 40 months to payoff
Credit card 2: 1,500 divided by 25/month = 60 months to payoff
Car loan: 5,000 divided by 125/month = 40 months to payoff
(Granted, this is all made more complicated by including interest rates, but we’re keeping it simple in these articles and will cover interest rates and how to beat them in a future piece)
So you’re looking at up to five years before you’re debt free… Not the most reassuring prospect.
But what happens if you can squeeze just another $25 per month towards that $1,500 loan?
Credit card 2: 1500 divided by 50/month = 30 months to payoff
Not only did you cut the payoff time in half, but now you have an additional $50 per month to apply to one of your other loans, which now look like this:
- Credit card 1: $750 remaining balance @ $75/month = 10 months to payoff
- Car loan: $1,250 remaining balance @ $125/month = 10 months to payoff
What happens when you apply that additional $50 towards your credit card?
- Credit card 1: $750 remaining balance @ $125/month = 6 months to payoff
And when that one’s gone, let’s add that money to your car payment…
Car loan: $500 remaining balance @ $250/month = 2 months to payoff
Congratulations – you’ve now paid off five years’ of debt in just a hair over 3 years.
There’s lots of ways this can play out, but after doing the math we’ve discovered that it’s just a hair faster to accomplish total debt-freedom by paying off the lowest balance first (38 months vs. 39 months).
Remember to check back with us for future installments – the internet is full of gimmicky debt relief articles, but these aren’t them. We’re here to help the most people get the most out of their money.
Sound off in the comments with your best debt-payment advice! Let us know if you’ve found a strategy that works for you!