I remember when I read Rich Dad, Poor Dad for the first time and Robert Kiyosaki talked about good debt and bad debt. To me, debt equals payments and payments equal liabilities. I get the whole debate about real estate and investing wisely with debt, but that part of the conversation is beyond a lot of families who are struggling to pay bills and just tap into the interest on their credit card debt.
As of 2016, Nerd Wallet reports that the average debt breakdown in America looks as follows (per household):
- $16,000 in credit card debt
- $172,000 in mortgage debt
- $28,000 in auto loans
- $49,000 in student loans
- $133,000 in total debt
The total debt figure is lower than the combined sum of the rest because not everyone has every debt. But let's be honest, this isn't a good look.
Debt sucks the life out of us. It eats up our monthly payments and causes us to make bad decisions because we are enticed by it. Money issues are the leading cause of stress and divorce within relationships. When we don't have our finances in order, it can be difficult to have the rest of our lives in order. Whether you look at this is a symptom or the disease, there is no debate that it is a demonstrable issue. Getting rid of your consumer debt (non-mortgage debt) will help you significantly in the long-run and may even lead to a better relationship with your spouse because there will be no more money problems.
"So Rob, how do we pay it off?" Great question! This is precisely why I have ordered the 9 Moves in this way. Now that you have a 5% safety net (Move #3), you can plow through your consumer debt with little to no worries. There is some debate over the methodology. Dave Ramsey, a popular financial coach recommends the debt snowball. This is where you line up your debt from smallest to largest and payoff your debts in that order. The payment from the smaller one is added to the next debt and so forth.
I respect that method, but in some cases I believe there is a better way. Once you have all of your debt listed, try ordering it by APR and start paying it off from the highest to lowest. This is a more logical approach and saves you cash in the long-run. There have been studies on both sides that deal with motivation and perseverance, but I truly think that if you knock down your consumer debt by $5,000 it doesn't matter where it came from, it's just a win that you knocked down your consumer debt by $5,000.
No matter which way you do it, it's important to recognize that you need to stick to the plan. I wouldn't recommend vacations or luxuries during this stage. Every bonus, tax return, and penny from Flex Cash should go towards this. In round terms, if you have $30,000 in consumer debt and you have done the math and decided you can put $10,000 per year towards the debt, then it will take you three years to knock it out. That seems like a long time, but if it took you 20 years to pay it off with "minimum payments", three years seems like a much shorter time, right?
Once you have knocked out all of your consumer debt (celebrated cheaply) and press forward to Move #5. To be honest, Move #4 is probably the hardest and takes the most commitment. Once you have conquered this mountain, the rest of the program is a breeze.