Level 20
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Debt management

If I may contribute to this thread:

Getting out of debt, regardless of just how deep in debt you may be, is a six step process. I've also included 3 additional steps for building wealth, once the first five steps are completed. Basically, steps 7, 8 and 9 are done pretty much in unison with each other.

Step 1 - STOP DIGGING!  If you really want to get out of debt, then the absolute first thing you must do is stop digging that debt hole deeper by acquiring more debt. That means cut up all the credits cards. All of them. No exceptions. Now keep the debit cards, as they won't work for you if you don't have the cash in the account they are tied to. But the credit cards have to go.

Step 2 - List all of your debts smallest to largest. Ignore interest rates. They flat out don't matter really, for what you're doing to reach the desired end goal.  Do not include your mortgage in this list. However, if you have an "equity loan" commonly referred to as a Home Equity Line of Credit (HELOC) then do include that in your list.

Step 3 - Put into a savings account, a $1000 "emergency fund". What's the definition of an emergency fund? Simple. If not using that $1000 means that you will be eating your next meal out of the dumpster behind the neighborhood McDonalds, and sleeping that night in a cardboard box behind that dumpster, then you have a valid emergency. Anything less is not an emergency.

Step 4 - Stop ALL contributions to any and all retirement accounts. Understand that this is not forever. It's only for the short term so you can use that money to pay off your debt.

Step 5 -Take a look at that list you made in step 2. You start with the smallest debt first. Make the absolute minimum payments on all other debts, then throw every single remaining penny you can scrape together at that smallest debt.  Once that debt is paid off, the second smallest debt now becomes the 1st smallest debt.

Now that the first debt is paid off and that payment doesn't exist anymore, you have even more money to throw at your "new" smallest debt, thus paying it off sooner than you may have thought possible.


Now there is one exception for step 5 here. If you owe the IRS back taxes, I don't care where they may fall in your list of smallest to largest. You pay off the IRS *first*, no matter what. You don't need that monkey on your back, as if the IRS comes after you, they will not give up - even after you die they'll go after any assets you have, and they *will* get their money before your heirs get anything.


Step 6 - Build your $1000 emergency fund to 3 to 6 months of living expenses. Just exactly how much you need, depends on your situation. But at a minimum you should have at least 3 months of living expenses in a savings account or other investment that you or your family can get to "quickly" should anything happen to you and you are unable to work.

Step 7  - Reestablish contributions to your retirement account(s).  For most, they reach this step within 5 years of starting this process.

Step 8 - If you have kids or believe you will in the future, time to start the college fund.

Step 9 - Use all excess money to pay off the house, if you have a mortgage. Generally when a family/person who owns a house reaches this step, if they have a 30 year mortgage they have on average, 22 years left on that mortgage. Simply doubling your house payment means that on average, you will pay off that mortgage in 7 years, give or take depending on the interest rate.  I've known some who paid off their mortgage in less than 3 years.