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-When we get into the debt reduction plan, I recommend what a lot of financial planners call the snowball. Snowball pay down. And we've got this on a chart here where when we want to pay down our debt, we first of all, we want to get a list of all of our debt. At a lot of times, people will not want to get a list of all their debts. They don't want to know where they're at because it's so painful. It's going to reveal all their bad habits.
Well, not wanting your bad habits revealed doesn't get rid of this bad habit. You need to embrace them. And so we're telling people, just embrace where you're at, find out exactly where you are, and I recommend first of all, you get a list of all your debt. You want to get a list of all your debt here. And here we have a Visa credit card balance of $800, Discover of $3,200. You have a car payment of $13,400, and you have a house of $205,000.
And there a lot of our people watching now that says, you mean, you can buy a house for $205,000. And some of this, this is like a half a garage. Or a garage door. But anyway, so you have this. We have the total amount of money that we have. So what is the debt paid, what is the snowball effect? What we want to do is we want to line up all of our debt that we have. And we're not so concerned about the interest payments-- I mean, the interest rates.
A lot of people say, well, you want to pay off your highest interest rates first. I don't recommend that. I recommend that you take the lowest balance and move up to the highest balance, regardless of your interest rate. And the reason for that is that the debt pay down is not just a logical process. As a matter of fact, it's more of a psychological and an emotional issue. So you want to get an early victory as soon as you can on that.
And so you get this list, you put them in order of balance that you have. What is the minimum payment that's required here? And then what's really key on the snowball effect here, Clay, is you want to be able to have an extra debt payment that you can set aside each month.
-So step one is we want to list of all of our debts from the lowest balance on top to the highest balance on the bottom?
-And then step two is you want to list the balance and the minimum monthly payment and the number of payments remaining?
-Yeah. We've got the balance here. We've got the minimum payments. We got the number of payments remaining. All right?
-And then the third thing I guess, your third principle is what we want to determine the extra debt payment amount?
-So when we want to really get serious about paying down our debt, we have the minimum payments each month in each of our debt that we owe. And that is a total of $1,750 a month. The extra debt payment is saying, listen, every month we have the $1,750. How much additional dollars do we want to pay down against our debt amount every month, month in, month out. And that is, in this illustration, we're going to set aside $300 to add to that $1,750.
So that we've got now a total of $2,050 every month that we're going to apply against our debt. And here's how we're going to do that. How does it say the fourth step is?
-Well, the fourth principle, or fourth step it says, is create a new column for adjusted remaining payments based on adding the extra debt payment amount.
SPEAKER: So here we go right over here. This is this column that we're talking about right here, is this adjusted number of payments that are remaining. Now, this Visa card, we're going to pay this for 25 more months. And so with this new plan where we were paying $40 a month on this-- we're still paying the other bills. We're not forgetting our other bills. But we're going to add this $300 and we're going to add this to the $40 right here.
And so we're going to put in-- our snowball payment is going to be not just $40 for $340.
CLAY: So you're building up momentum.
-We're building up momentum from the first day on board here. The real key on the snowball pay down strategy is we've got to set up an extra debt payment. It's almost like a savings account.
-Now I want to speak to this a little bit. I know two people personally who've gone in and implemented a strategy very similar to this, and have totally changed their financial trajectory within, like, a four year window of time.
And another guy I can think of is a guy I know who actually graduated from college from a private university with a ton of debt, and he decided to use this strategy to pay off all of his student loans. Well, somebody might say, well, student loans? But no. He actually had a Visa card and the Discover card like you were talking about, the car. And instead of having a house, he had the student loans. And he used this strategy, this very strategy you have right here. And it was neat to see the little victory in his life over a two year window of time as he began to generate that momentum.
TIM REDMOND: Oh yeah. Here it's really important. Because debt, Clay, debt is so emotional and psychological that it's not just steps one, two, three. We got into it emotionally through this compulsion and all that. There's tremendous emotion that comes out of this discipline that we have.
Here we're adding $300 to our $40 payment. Now we're putting $340 a month against our $800. We've only got three payments there. Actually, less than three payments.
CLAY CLARK: Makes sense.
-Now here's the key to really understand because a lot of our entrepreneurs, a lot of our Thrivers, some of them are really good with numbers, and some of them, like, check out when we talk about numbers. Stay in there with me. I'll tell you, this is going to be really, really important. Because this is going to be setting the captive free. I'm going to do some Sunday morning preaching here.
All right. So now we go on to our next debt. It's the Discover bill. We have $3,200 balance here, and we're making this minimum payment of $150. Now what we're going to do is we're going to make that $150 payment, but we're going to add $340.
Now why is it $340? Because we still have this $300 a month, which is the extra debt payment amount. It's that snowball payment amount. But we also keep paying the debt we were paying. Even though this debt's paid off on Visa, we're going to continue to apply the money that we were applying to that Visa now into the next payment.
CLAY CLARK: Makes sense.
-So now the snowball is rolling down the hill. It's getting a little bit bigger. It's gone from $340-- now it's $340 plus $150 is now $490 that we're having coming against that. Now we only have-- we have $490. We've only got about six payments against this. Instead of having 27 payments, now we've got about six payments to pay off this.
CLAY CLARK: Makes sense.
TIM REDMOND: This Discover. It keeps going down, time after time. I just did this with a client not too long ago. They're in my office, and I'm telling them about this. We've got all their debt lined up. They feel hopeless. They feel hopeless. They're just overwhelmed, just drowning in this debt.
I show this chart to them, and the wife starts crying, Clay. She starts crying. Not because I said something offensive, because I've had people cry when I say something offensive. This time it wasn't that. She literally could see that they could be completely out debt-- completely out of debt with a simple plan in less than five years. And they felt like they were going to be lost in it forever.
CLAY CLARK: Now one thing that's powerful here is if you feel like-- if you're watching this right now and you feel like you just have no ability to get out of debt and you have a sense of hopelessness, I recommend that you do a screen grab. You pause it right now, and you immediately begin making a spreadsheet just like this. And if you don't have a spreadsheet, go grab a sheet of paper. Write it down.
But go ahead immediately. I mean, we're talking about today. Like, if you're watching this right now and yo have to go to work in a minute, when you get home from work, let's do this. This is something we want to do. Because you can get out of debt, and you can be very powerful about how you manage your money.
TIM REDMOND: What I have found, Clay, remarkably-- almost with any debt amount, including a home mortgage, that if they will be really aggressive with this extra payment amount, to really-- and you know, and I have worked with people that no matter what their amount is, Clay, when they begin to set this up and they get really aggressive with that extra payment, and they can find the money for this extra-- oh, there's no way I can have the money for this extra payment-- they can find it by reducing the number of visits to Starbucks. Bless its holy name. [INAUDIBLE] my wife's sacred shrine.
There's all kinds of expenses they're looking at, their insurance. A lot of times people are wasting money on their insurance and paying too much on this. So they've got bad habits of this or that. Almost every client, I can come up with $300 with, $500. And what I have found is that almost every client can get completely out of debt in seven years or less. It's remarkable. It's remarkable.
Even though it feels like you're way beyond seven years, give this-- really give it a chance. Really focus on it. And I'm telling you, just the hope and the victory you're going to feel, and the power you're going to feel-- you're going to start ripping off that straitjacket, and you're going to feel like a whole new man, a whole new woman.
-Tim, I know in your career you've have a lot of success. And one thing I think that's exciting is you've helped a lot of people get their finances in order. And I know that you could be anywhere in the world right now. Literally you've been all over the world. And I appreciate you taking some time to be here with us tonight. And I just want to again say thank you so much for teaching us these seven principles for powerfully managing our money. Just-- I appreciate your time.
-Thank you so much for letting me be here, Clay.
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