Introduction
Steve Rhode: Hey, you’re back with the Get Out of Debt guy. I’m Steve from the old Get Out of Debt Guy, and next to me, as always, is Damon Day, the new Get Out of Debt Guy. Damon, say hello.
Damon day: Hi.
Steve Rhode: Okay. So Damon, you had a great idea for the topic for today’s show. Go ahead, put it on me.
What do you do when you no longer have debts?
Damon day: I did that, and this is a topic that I’ve had several questions about, and I think you have too on the website, which is, what do we do when we’re out of debt, right? Like, okay, I’ve had this plan, I’m out of this debt. Now we’re debt free – go on Dave Ramsey’s show and shout “We’re debt free!” – although you might not want to do that if you don’t do it his way.
Steve Rhode: You know what always makes me chuckle: is anyone ever debt-free? I mean, you have property taxes, car taxes and of course you have future financial obligations. So I mean, I understand his thing is about credit cards, but no one is ever really out of debt.
Damon day: Okay, so you’ve dealt with your debts, and like you said, what now? What do you tell people?
Steve Rhode: One of the things I’ve always said over the years is: there’s no point in wasting a perfectly good mistake. Let’s find out what we can learn from the current situation, not do it again, and prepare for a better future life.
When should you start saving?
Steve Rhode: And you and I have talked about this before. It almost always means that when you’re trying to get yourself out of debt or manage your debt, that’s when you start the savings habit. Don’t wait for it to be over, because far too many times we’ve both seen situations where people procrastinate, never take action, and their debt situation doesn’t get better immediately, and then they’ve wasted all that time they could have saved.
Damon day: This is the other question I get a lot. Okay, so I want to start saving, right? I need to build up my pension because I emptied it to get out of debt. And so the question arises: when do you start saving if you’re still in debt?
There’s one camp that says you can’t really save a significant amount of money while carrying consumer debt, right? High interest credit card debt – because you’re paying 25% interest, so what’s the point of putting $500 a month in a savings account and earning 4-5% when you pay that?
But the other side of that argument is, yeah, but if you keep telling yourself that you’ll start saving when you’re out of debt, but maybe you continue that cycle of debt for 5, 10, 15, 20 years, but you never save and invest money because you keep thinking, well, financially it doesn’t make sense to invest money while I’m still paying this money.
Steve Rhode: When you’re thinking about getting out of debt and saving, it’s not just about the amount of interest, because the one thing you can never buy back is time. And time is the biggest multiplier of your money to get a much higher result in the end.
The fastest way to savings
Steve Rhode: What I’m getting at is the fastest way to start saving, building your safety net, and saving for retirement if you qualify for Chapter 7 bankruptcy. You can eliminate your debt within 90 to 120 days. You can start saving and building that emergency fund now, and you can start saving small amounts that add up to millions in retirement.
Damon day: Well, let’s answer that question. If it is responsible, when should you start saving? Let’s say they don’t want to go bankrupt or they have problems that prevent them from going bankrupt.
Steve Rhode: Well, I always think they should start putting it aside today. But what’s really interesting is that back when my company was managing people’s finances, their salaries came to us. And the big lesson we learned was that as soon as you tell someone they have saved $700, which they’ve never been able to do before, they feel compelled to spend it.
Practical savings strategies
Steve Rhode: I think we can solve this by not waiting until tomorrow to start saving today. And there are easy ways to do that, whether it’s getting into some of these banking programs like rounding up your purchases, or Acorns, or you can do something like Betterment where you can deposit a certain amount of money every month. If it’s taken out of your bank account when you get paid, it’s gone.
The problem I see a lot of people have is that they save too much in the beginning. “I’ve got to build that now. So I’m going to put in $100 every payday,” and then things get really tight for them and then they just stop doing it.
Start with $25. If you can do that and not miss it, throw it up. You keep working against it until you build that safety net.
The reality of the emergency fund
Steve Rhode: And here’s why that safety net is important: Call it an emergency fund or whatever you want to call it. If you don’t save money to prepare to cover emergency expenses, what happens is that the next time you need a new set of tires, it ends up back on the credit card and all the progress you’ve made is completely wiped out. You’ll be right back where you started.
Damon day: And so people end up coming back to where they get a personal loan, right? Pay off credit cards because they look at the interest rate – oh, this is a personal 15% and I’m going to use that to pay off this $20,000 in credit card debt at 25%. But now they’ve freed up all this credit, but now they also have the new payment on the personal loan. So their finances are still tight.
Then the new tires. Johnny needs $100 on his school lunch card, whatever it is; it’s on the map. And before you know it, you’re still making payments on that personal loan you used to get out of debt, and now the $20,000 has crept back onto the credit cards within a year or two.
The Safety Pilot concept
Steve Rhode: What many people don’t know about me is that I was also a search and rescue pilot. And I bring that up because there are often times when you find yourself in a situation where you really need someone else with the right skills to talk to – we always call it a safety pilot.
The point is to pick up the phone and discuss the situation with someone else before you do something stupid. And often that can lead to a good conclusion. And Damon, I think you are the safety pilot for a lot of people who, if they just contact you through your website at DamonDay.com, could make very good, well-informed, informed decisions about how to move forward instead of just getting stuck in the cycle of debt or falling for the next scam.
The $2,000/month planning window
Damon day: This is what I always say to my clients. If you’re on some sort of debt relief strategy and you spend a certain amount per month from your checks on this debt repayment (let’s say that’s $1,000 per month, $2,000 per month) once you’re done with the debt, then you have this window where you have $2,000 per month that you had allocated for the debt repayment. That doesn’t fit into your lifestyle, does it? You live your life without that money.
If you reach that point without a plan for what you’re going to do with this $2,000, here’s what I promise will happen. In a few months you’ll be thinking: what for $2,000 a month? It’s all gone.
Steve Rhode: Life expands to fill your income.
Damon day: Precisely. So that’s the biggest thing I can tell people is if you’re getting out of debt and you’re allocating a whole bunch of money before you’re ready, at some point sit down and make a plan for a wish list. If I had this extra $2,000, what would be important to me? Would I want to max out my 401k? Do I want to save for a trip? Do I want to catch up on my children’s savings for college?
401k matching: free money
Damon day: If you have an employer who provides you with matching money, that’s 100% free money, just for you saving for your own retirement. It would be ill-informed if you didn’t.
That’s the first thing I go to: Hey, do you have a 401k at work? Yes. Do they have a match? Yes. Do you at least maximize the contribution to the maximum match? No, you’re not. Okay, start there. That’s easy. This involves a discussion with HR. “Hey, I want to increase my contribution.” Finished. Out of sight, out of mind.
Hyperbolic discounts
Steve Rhode: The other thing is this dangerous behavioral economics theory called hyperbolic discounting, which has been proven: it shows that we put more weight and emphasis on today than we will tomorrow.
The question I always like to see people struggle through is: OK, you’re willing to spend $60,000 in monthly payments over the next five years to get yourself out of debt. But if I told you that you could put those same monthly payments into something easy like a Dow Index Mutual Fund for the next five years and never put another dollar into it, that would be more than a million dollars when you retire. What makes more sense to you?
Debt is nothing but math wrapped in emotions. Either way, have the information to make an informed decision.
Credit reconstruction
Damon day: Start rebuilding your credit. That’s another big thing. What do you do once you’re out of debt? Start rebuilding your credit. Dave Ramsey will say fuck that, but I say life is easier with good credit. There are simple things you can do: start by opening some new cards and use them responsibly. But start rebuilding your credit.
Wrapping up
Steve Rhode: You can clearly see that Damon can talk. And if you want to talk to him, just go to his website: DamonDay.com. And you can reach him there. Until next time, Damon.
Damon day: Goodbye.
Steve Rhode: Peace.
#debt #financial #plan