ACCOUNTANT EXPLAINS The Smartest Way To Get Out Of Debt

The smartest way to get out of debt, and I need you to hear this, it's not what most people in the personal finance space are telling you. Here's the reality: Americans are carrying $18.8 trillion with a T in household debt right now, and the average household over $105,000. Credit card rates are sitting at 21% or more, and the reality is that you're not bad with money, you're just working off of a broken plan. So in this episode, I'm gonna show you the real way out, the real way to get outta debt, the best way, and start building wealth at the same time. This is Building Your Money Machine, where we help you master your money, eliminate financial stress so you can live a life by choice. Because earning more doesn't make you free, a money machine does. And I'm your host, Mel Abraham. After 30+ years as a CPA, an entrepreneur, and a money mentor, and someone who's walked this financial freedom journey from nothing to something, then broke it and had to rebuild it again. I've seen what works with real wealth, and it's not bigger numbers, it's bigger and better choices. So if you're ready to get out of debt and do this the right way, let's jump in. All right, so let's talk about how— what the smartest way is to get out of debt. Remember, I didn't say the fastest way, the smartest way. And, uh, I'm gonna walk you through the exact steps here, but before I I need to say something that I think most people in this space won't say to you. Something that might actually irritate, yeah, a few of my personal finance colleagues, but I don't care. I'm okay with that because I've been a CPA for over 30 years and I've sat across the table from hundreds of real people, people dealing with real debt, people with dealing with real fear, people with real stress, sleepless nights. And I've watched what happens when they follow the most common advice out there, which is, okay, stop everything. Don't invest, don't save, don't breathe, don't eat, just destroy the debt first. And here's what happens when they do that. They get outta debt for sure, but then they're broke. They have no savings, they have no investing, they've got no momentum. And you simply traded one financial hole for another. So today, yeah, we're going to talk about how to pay off debt, but we're also going to talk about the specific methods, the mindset, the mechanics, all of it, to break it down for you. I'm going to challenge the idea that the debt payoff is an either-or game. I actually think it's not, and I think thinking it is might actually be costing you more than the debt itself. All right. And this would be— this is the uncomfortable truth, because when we start to look at the kind of society we've been indoctrinated into, Americans collectively right now carry $18.8 trillion in household debt right now. That's trillion with a T. Okay. The average household owes over $105,000. Credit card debt alone has hit $1.3 trillion, which is an all-time high. The average credit card APR rate now is 21%. 21%! Let that sink in. So yes, debt is a real problem, a serious problem. And I'm not here to wave it away or tell you it doesn't matter. But here's where I part ways with most of my— the financial advice that you've heard. Most of it treats debt payoff as a single-focus, all-or-nothing crusade. But the popular approach goes something like this. Stop everything. Build a tiny emergency fund, like $1,000, and then throw every single dollar you have at your debt. Don't invest, don't build, just grind until the debt is gone. Then you can start your life. Okay, and I get the logic. In fact, the mathematics work. I mean, I really do. But here's my problem with it. Life doesn't pause while you pay off debt. Your employer's 401(k) match doesn't pause. Compound interest doesn't pause. Time doesn't pause. And here's the part nobody wants to say out loud. The years you spend waiting to build wealth are years you're never gonna get back. So I'm gonna break it down. We're gonna walk through some of it. And it's built on the premise of my wealth priority ladder that I talked about in my book, Building Your Money Machine. And I teach in my courses, uh, the Money Machine Blueprint, but It is something that I think gives you the way to optimize your cash, to break it down. I look at it as a recipe and just like all recipes, the recipes give you the ingredients, they give you how much of the ingredients you need, and they give you the order in which to put it in. And just like any recipe, you might have the right ingredients, but if you put them in, in the wrong order or the wrong mix, you get the wrong result. So think of this as your recipe, your step-by-step. And step 1 is what I say is build a comfort fund first. Now, what I'm trying to do is build an unshakable financial foundation for you to build wealth on that is sustainable. And so the idea of a comfort fund— this is not your emergency fund, this is not your peace of mind fund. This is simply a no panic fund. We're going to put $1,500 or 1 month's expenses away in a high yield savings account. And whichever one's greater. This isn't about touching the debt. It's not about doing anything. It is simply saying, hey, if something happens, you don't have to go into debt or you don't go into the ditch. It's, it's not because the $1,000 or the $1,500 is going to change your life, but because without it, the first time your car needs a repair or the dog gets sick or the AC goes out, you're right back on the credit card. So I'm literally trying to plug the holes in the bucket so we can fill the bucket. And so we plug the holes first. That's the comfort fund. Step 1, we put money away to do that. Now, then we go into step 2, and I call this 2A and 2B. And this is where I diverge from the mainstream and the other commentators out there, because most advice, like I said, say eliminate all debt first, then build, build savings. I disagree. I say you do both simultaneously. Now, I didn't say you do them equally, simultaneously at the same time. Here's why. I look at, at debt and wealth as their behaviors, their muscle groups. And here's how I think about this. I want you to lock this in because it's going to reframe everything. Debt management and wealth creation are two different skills. 2 different mindsets, 2 different muscle groups, 2 different beha— sets of behaviors. Think about it like this. You're gonna go to the gym and it's the first time you're going to the gym and you have weak legs and you have weak arms. And so you go hire a trainer. What does the trainer tell you? Is the trainer gonna tell you, hey, don't touch your, the upper body until your legs are perfect. Just legs for the next 2 years. Then we'll talk about your arms. No way. That's not the way it's gonna, gonna work. He's gonna— he or she's gonna build a program where both of them are developed simultaneously. Maybe a different emphasis, at different paces, but based on where you're weakest, maybe. But both will be moving at the same time. And I think the same principle applies here. The debt muscle is about discipline. It's about cutting expenses. It's about creating a payoff plan. It's about reducing what you owe. But the wealth muscle, it's about liquidity. It's about investing. It's about creating assets. It's about building a system that pays you while you sleep. And so, you need both. And the good news is that you can train both at the same time. You, you just have to do it in the right order. With the right emphasis. And that's exactly what I'm gonna show you here, where, where it makes sense, because that's why it matters. Here's how, how you gotta look at it. In Step 2A, which is to eliminate what I call destructive debt, think about this. That's your, your credit cards, that's your consumer loans, that's your high-interest debt. This is the stuff that's costing you 18, 21, 22%, 24%, and giving you nothing in return. Destructive debt is that debt that is meant for your lifestyle, for consumables. It is, it is the big screen TVs. It's the, the cars that you have to finance for 7 years because otherwise they're not affordable. It's the luxury vacations and the things that, that you have to find. Consumables, lifestyle. There's no business for that in our life. The lifestyle stuff we should be paying for at the speed of cash. Okay, if we can't, if we can't pay that off, then we need to get it on a debt payment plan. And so that's the kind of debt we're going to focus in on. Now, that's step 2A. 2B is building the full liquidity. Remember, we started with a comfort fund, but 2B is about getting you into the emergency fund or the peace of mind fund. Now, the emergency fund is 3 to 6 months of your expenses, your, your survival expenses, your necessities. Okay? That's 3 to 6 months, which is cute. And I, I get it. And it's a place to start. I want people to push over time to 9 to 18 months. So the elimination of the destructive debt and the building of the peace of mind fund or the emergency fund are done at the same time. You know, there's the way— that's the way we need to work it to work both of them. But that doesn't mean that you do them equally. If I have $1,000 to use towards debt and building my liquidity, doesn't mean it's $500 and $500. It's up to you. But a lot of my clients might say they're going to put $800 or $900 towards the debt to get it paid down, but they're going to exercise the wealth creation and the liquidity and the building of that by putting the extra $100 or the $200 to building the peace of mind fund. And when they have the peace of mind fund taken care of or the debt taken care of, then they'll reroute that money towards investing, true investing into index funds and ETFs. That's how it works. But it's not one or the other, it's both. It's both. Now, there is a question and we'll walk through how to get out of debt, but there's a question that people say, well, should I invest while I'm still in debt? It's probably one of the most frequently asked questions I get. And, and the short answer is yes. Okay. And especially when we have access to free money and I built this into the Wealth Priority Ladder just the same. And let me explain for a moment because this can, makes some people uncomfortable. But imagine for a moment that your employer offers a 401(k), and they offer a match. They match your 3% contribution 100%. So that means that if you put 3% of your salary in, they put 3%, uh, on it. So you got 100% return on your money. That to me is something you cannot leave on the table, full stop. So, If I have access to the match, I'm going to have that supersede the liquidity. In other words, I'm going to put money towards, towards the debt paydown. I've got the comfort fund in place. And now if I have the match, let me get the match before I fund the peace of mind fund, because I'll use the comfort fund to cover me. So hopefully that starts to make sense because think about this. Your credit card charges you maybe 21%. but your employer match is giving you 100%. Mathematically, there's no world in which ignoring the free money is a smart decision. So it's, it's not about the strategy. If we don't do that, you're leaving a stack of cash on the table and walking away. Okay. That's the thing that I think we need to start to, to look at, because it also gets you into the investing game. At the same time. So, as we start to break that down, you now see how it starts to play out. So, our money's going to be doing multiple things at the exact same time. Unlike what most people are telling people to do is to do nothing but pay down debt, pay down debt, pay down debt. They in fact tell you eat beans and rice. Now, I get it. That can work. But It's not the way I think is the best way to pay off the debt. So let's talk about that. What do we need to do to destroy the debt? What do we need to do? How do we get through it? And, and there's a couple things to, to think about. I'm not one that believes that all debt is the devil. I've already talked about what destructive debt is, but I also believe that there is productive debt. Now, productive debt is strategically used, can be good in the sense that productive debt is that debt that's used to create cash flow or wealth over time. So it could be a mortgage on a rental property. It could be a loan on a piece of equipment that increases productivity at the company. It could be putting temporarily putting Facebook ads or ad costs onto a credit card that you're going to ROI that is actually making you money over the long term. So there is strategic use of productive debt that I think makes sense. I'm not talking about that. Although we don't want to accumulate that debt, I'm talking about the destructive debt, the lifestyle debt, and how do we get rid of that and how do we build that? Well, there's two primary methods, and then I'll give you another element to consider. And the two primary methods are the avalanche and the snowball method, and they've been talked about a lot. And let me just walk you through them. In a simple way. Okay, the Avalanche Method is this: you list all your debts by, by interest rate. So highest interest rate first, down to the lowest interest rate, and that's the order in which you're going to pay them off. You're going to take whatever money you're going to put towards the debt, you're going to pay all the minimum payments for all the debts except for the highest interest rate. You'll put every excess dollar beyond what you're putting into the the, the, uh, liquidity fund and into the high-yield savings account towards the highest interest rate first. And then once you pay that highest interest rate balance off full, you'll take all that money and go to the next highest interest rate, next highest interest rate. Mathematically, this is the most efficient way to pay down the debt. It's going to carry the least amount of total interest paid Over time. So if you're math-brained, if you're logic-brained, if you're a spreadsheet-loving person, hello, this is, this is the thing that will work for you. It's a, it's a method that makes sense logically. However, sometimes what ends up happening is that you can't get out of debt, that first debt, as fast because it's a lot of interest cost. And so there is the second method called the Snowball Method, which I think is a psychological method. And here's how this goes. Instead of listing them by sequence of the highest interest rate first, you start and list them by the smallest balance first. That means that you're, you're going to have a shorter distance to, to get one balance paid off. You do the same thing. You take all the money and pay your, your minimum payments on all the other debts. And then whatever excess funds, you put it towards the smallest balance first. And then you go to the next smallest balance and the next smallest balance. And what happens is that it snowballs downhill. And this to me is an emotional psychological methodology because you get the quick wins, cuz typically you're gonna pay that smallest balance and you got, got one balance paid off and you can celebrate the win. And I get it. And, and research shows that the quick wins from paying off smaller debts increases the follow through and we have to stay in the game. Remember, debt, debt management is about discipline. And so you stay in the game longer because you feel like you're actually making progress. Okay. So the thing is this, most people, this is the one that they will pick because of it. And it's one of the most popular ones to do. I think if you have the discipline, then the, the, the Avalanche Method is the better way to go because it minimizes your interest costs. But, Which one's the best for you? The one that's best for you is the one that you'll actually stick to. Because here's what I need you to do. You're gonna choose one or the other, and you're gonna stick to it until your debt, your destructive debt, is completely paid off. Now, there is one nuance to this, and that is what I call emotional debt that may take priority over the, the highest interest rate or the lowest balance. And what I mean by this is this. Let's assume that you borrowed money from a family member. Okay. Now you see where I'm going. You've borrowed money from a family member and you're supposed to be paying them back. And there's this emotional element to that debt as long as the debt is outstanding. And so sometimes we will have clients that will pay the emotional debt first and then go to the snowball or the avalanche to get that emotional burden off of them. It makes for an uncomfortable Thanksgiving dinner when you owe someone in the family money and then they hear that you're doing these other things that they think in their mind that you shouldn't be doing until you, you pay them back. And so sometimes we'll prioritize emotional debt and then go to the avalanche. Or snowball method. But most of the time you're going to pick one and stick with it and just stay the course. That's the game that I want, want you to play, because, because without it, you'll be in debt forever if you keep jumping in, jumping off. Now, speaking of debt forever, why do people stay in debt? Why is this? Now, I also believe that one of the reasons we have the debt we have is because we've been indoctrinated into a payment society. And we have gotten used to payment plans and debt and being part of our world. And so we've gotten comfortable with it. I, I, and I think that it's a mistake. We need to rethink how we're doing these things because that creates a behavior. Now, here's, here's some of the reasons that I think people stay in debt. Most people don't have a math problem. They have a behavior problem. The math is actually simple. Spend less than you make and then direct the difference towards the debt, towards investing, towards building liquidity, and the repeat, and then repeat it. That's it. But if the math were enough, nobody would still be in debt. It would be easy. And so it's not a math issue. It is a behavior issue. It is a, habit issue. It is a discipline issue, which is why I tell people, once we get you on a debt payment plan, I want you to automate it so you no longer can fall off the wagon. You can no longer— the more I can get your willpower out of the game and have it happen automatically, the better off we'll be. Okay. And so then the second element of this is this: they don't face the number. They open that credit card statement and it can feel like you're going to the doctor about a mole that you've been ignoring. And not looking doesn't make it any better. It makes it worse. And so, what they're doing is they're actually avoiding talking about it. Courage isn't the absence of fear. It's facing it and acting anyways. And so, this is why one of the first things you're going to need to do is get real with yourself. About the debt, about the spending, about the behaviors, about what's going on, why you're there, what, what is happening. And I get it. Things happen. It could have been a medical emergency. It could have been something unplanned. I get it. But do we have the behaviors in place to get us out and not keep going deeper and deeper and deeper into debt? The next reason that I think this happens is that shame is running the show. See, I tell people, you don't have money problems, you have money symptoms. And they're symptoms of the decisions made under pressure, the decisions made under stress, and sometimes under circumstances that weren't entirely under control. But there is the ability to make a decision to change too. That is in your control, starting right now. And so, there are things when we talk about this, that we could find ourselves in a place that we didn't anticipate. I certainly didn't expect to lose one-third of everything I owned in a Ponzi scheme, but I did. And the shame got to me. But if I wasn't able to elevate myself beyond the shame to realize what I was in control with and what I could make decisions about, I wouldn't be here today. The next one is that they have no why. See, numbers motivate nobody long-term. Stories do. Why are you building the money? Why do I need to get out of debt? What's the story you want to tell in 2 years, in 5 years, in 10 years? Is it not checking your account before dinner? Is it sending your parents on a trip? Is it telling your kids they don't have to have student loans because you built a machine? That's your why. Write it down. Put it somewhere where you can see it every day, because when we operate from a higher purpose for our money, we raise ourselves to a higher purpose in the process. All right? So here's the thing. Let's look at this. As hard as it is, no matter where you are, age, stage, the debt is a burden and we have to get you out of it. And there's only two primary ways to do it. Avalanche, snowball, but it requires your discipline, your diligence to make it happen. All right, so I'm going to give you like the 30,000-foot view of this, what you're really building here, because getting out of debt is not the destination. Getting out of debt is the foundation that makes the destination you want possible. The destination is a life where your money works so you don't have to work for your money. A money machine that generates income while you sleep, while you travel, while you spend time with the people that matter. Debt, it's the wall between where you are and where you want to be. But you don't get to that life by just knocking down the wall. You also have to build the house. And that's why I want you to do both at the same time. Knock down that wall and build the house at the same time. Because most people knock down that wall and they stand in an empty lot exhausted. With no money left to build because they listen to the traditional advice. You're not going to do that. Here's something I want you to carry with you as the goal of this whole thing, and it isn't a zero balance on a credit card. The goal is a life where your money no longer is the thing that's making the decisions for you. A life lived by choice, not by chance. That's the game, and this is how. To play it, but not only play it, this is how to win it. So I hope that this makes sense. I hope that you'll not just watch this or listen to this, that you'll go do something with this. Okay? And if you need help with this, go ahead and get my Debt Breakthrough Calculator. It's totally free. Go to melabraham.com/nodet. Put your debt in. You can figure out whether you want avalanche or snowball. It'll spread the payments for you. And then you just walk the path. I promise you, you will be happier on the other side of that, and you will be soaring to the financial freedom you deserve. Because earning more doesn't make you free, a money machine does. All right, can't wait to hear from you. Do me a favor, pop a comment, send me a DM, let me know what you think. And while you're there, hit the subscribe button and thumbs up. It makes the algorithm happy, but it makes me happy also. All right, until I get a chance to see you in the next one, are on your path to financial freedom. As I always say, always, always strive to live a life that outlives you. See you next week. Thank you for listening to the Affluent Entrepreneur Show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com/group, and I'll see you there. And that's it for this episode of Building Your Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you'd do me a favor, go to Apple Podcasts or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people, because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.