I saw this infographic about financial freedom and paying off your debt on Pinterest yesterday and had to share it. It’s got great advice for paying off debt and working toward financial freedom from Jean Chatzky, author of the book Money Rules: The Simple Path to Lifelong Security.
It’s a little hard to read so here is all the information contained in the infographic:
Bridge To Financial Freedom
7 Steps to Paying Off Your Debt
A debt-free life is one that few of us have ever known. We all want it, so why is it so difficult to turn this dream into a reality? It isn’t impossible, but it does take elbow grease and sacrifice. Here are seven steps you must take to cross the bridge to a debt-free life, based on the rules outlined by financial guru Jean Chatzky in the book Money Rules: The Simple Path to Lifelong Security.
Cross the bridge to a debt-free life!
1 – Spend less than you make. Period.
Stick to money rule #10: Live below your means. Of course, this is easier said than done. In 2010, nearly three-quarters of Americans surveyed by the American Savings Education Council for America Saves Week said that they spent less than they earned and saved the rest. But in 2012, the percentage has shrunk to two-thirds. Needless to say, until you spend less than you earn, you will never get out of debt.
2 – Recast your personal balance sheet by lowering all possible interest rates.
Credit card: Transfer your credit card debt to cards with low or no interest. According to NerdWallet.com, there are currently 24 cards offering an introductory 0 percent interest rate on balance transfers if you have good credit.
Auto & Mortgage: Refinance your auto loan and mortgage (perhaps again, if you previously have). Right now is a great time to do so, 30-year fixed mortgage refinances are averaging 3.61 percent right now.
3- Pay off highest interest debt first.
It can be advantageous to focus on paying off your highest interest debts first. However, there is some back and forth over which of the following techniques is a better way to pay off debts.
Avalanche (best) – Focuses on paying off your highest rates first.
Snowball – Focuses on paying off your smallest debts first.
Say you have $300 to put toward your credit card debt each month. Card number one has a 20 percent interest rate, a $7,000 balance, and a $140 minimum monthly payment. Card number two has a 13 percent interest rate, a $3,000 balance, and a $60 monthly payment.
If you take the avalanche approach and put your extra $100 a month toward credit card one, you’ll pay $3,760 in interest. Put that extra money toward card two instead and your interest tally is $4,304.
4 – Audit your bills to find more money.
Chances are you can make more money available to pay down your debt than you think. Find this money by calling your monthly billers – cable, cell phone, internet, and asking for a better deal. Better yet, cancel monthly subscriptions that you don’t really need.
5 – Improve your credit score.
Money rule #30: Check your weight and check your credit score every year. The latter should go up. Why? A better credit score gets you lower interest rates and saves you money. Improve your credit score by
- Paying all your bills on time.
- Paying down debt to lower the percentage of the available credit you’re actually using (your utilization).
- Not closing any credit cards.
- Not applying for new credit.
Consider this: Two people with different credit scores get a $20,000 car loan to be paid over 48 months. Here is how their credit score affects their monthly payments:
Sue: 720 – 850 – $448 a month
Jim: 500 – 589 – $579 a month
Because of his low score, Jim will pay over $6,000 more in interest over the life of the loan.
6 – 50 Points or More
Once your score has improved by at least 50 points, repeat step 2.
7 – Save what you don’t spend.
When debt is gone, take the money you’re not using for repayment and save it by setting up an automatic transfer into a savings account, money market account, or IRA.
Money Rule #11: If you can’t see it, and can’t touch it, you won’t spend it.
These are actually all decent personal finance rules to live by! She is completely on the mark about living below your means and you won’t spend money you can’t see or touch.
To learn more about these money rules from Jean Chatzky, pick up her book Money Rules: The Simple Path to Lifelong Security.
