Ryan Vaughn shows how to use a free debt-snowball calculator to pay off debt faster by targeting smallest balances first. With an extra $250 monthly, his example goes debt-free four years and nine months earlier and saves $38,000 in interest.
How do I get my business out of debt? So I'm actually going to show you a tool that you can find at insighttax.com/wealth for free. Another tool you're going to find on there, which is kind of the first step, is analyzing your expenses. In order to pay down debt, especially to get rid of it, we have to make larger payments than the minimum amount. The easiest way to start with analyzing what you can afford is to cut back on your current expenses. If the expense you have isn't leading to adding new customers or retaining your current customers, then it might not be an expense that we should be keeping. So on insighttax.com/wealth, you can find a handout on 9 expenses that I write about in Profit First for Microgyms that you ask 9 questions you ask about every expense, and that will help you determine if it's productive or not productive, if it's contributing to adding clients or, or not, or if it's contributing to retaining clients or not. So now let me share with you a tool. You might have heard about the debt snowball. People give Dave Ramsey credit for this. It is my understanding he's not the originator of it, but he's the one who talks about it the most. So I'll give credit to him too, but ultimately it, it's a tool that's going to be beneficial. And it doesn't necessarily mean that I endorse Dave Ramsey if I'm sharing this tool with you. That's For the debt snowball. So you would put the balance date of what you're going to enter in. So I just put May 9th, 2022. You can change these names as much as you want. I'm just going to give you an example. Let's say I have a credit card, I owe $30,000 on it, and the interest rate is, say, 18%, and my minimum payment is currently $650. It's going to tell me then, well, if you just make $650, you have another 80 months left to pay it off. And you have 6 years left, you would have— you will eventually have paid $21,000 in interest. Let's say it could be an auto loan. Let's call it a business loan. Let's say I owe $150,000 and the interest rate is 5.5% and my minimum payment is, I don't know, $1,500. Calculates that. I don't know what's a— let's say maybe I got behind with a vendor. I have an accounts payable. I owe a vendor, say, $5,000. He's not charging me an actual interest rate, but I agreed to pay $500 a month until it's paid off. So 10 months. All right. So what this is now telling me with all the information you put in, and again, you can relabel these, it's saying that all these debts will be paid off just by making the minimum payments by July of 2033. So in 11 years, I'll free up this cash flow. So now we go through the steps, we analyze our expenses, and we see, you know what, I can afford to put an extra $250 a month towards paying down my debt. So with the snowball, what we're saying is we're going to start with the lowest balance, regardless of interest rate. And we're going to work to pay that amount off first. And then we're going to use this $250 extra dollars to apply towards the lowest balance. So you can see that the total payment is now $2,900 as opposed to the $2,650. It's $2,900. We have it arranged here in order of lowest to highest. Take me 7 months to pay that off by 2022. Now once that's paid off, the $250 plus the $500, that gets applied to the new credit card amount, because that's the next lowest balance. So now I'm paying $650 Plus $500 plus $250 every month towards my credit card, which then has me paying it off in 28 months versus 80 months like I was originally scheduled to do. And then once that balance is paid off, uh, I use all the excess amount. So now I'm using $650 plus $500 plus the $250. going towards the business loan. And so that would take 76 months to pay off. So I would be debt-free if I just had $250 extra a month. I would be debt-free by September of 2028. So in this scenario, we cut off 4 years and 9 months, almost 10 months. With doing it under this method, uh, we would have saved about $38,000 in interest. Um, so it's a tool you can use. Again, you put in your information, it does a lot of the calculation stuff for you, and you can look at it that way. So when clients ask us, how do I get my business out of debt, we first have to identify extra cash to use, because just paying minimums, while That's a good approach if that's all you can do. We can find a little bit extra to apply towards it. That's where the Profit First system comes into play. So if I'm doing a profit distribution, instead of using the full amount of the profit distribution to me quarterly, I might use $100 of it, and then the entire rest of the profit distribution I'm applying to debt. And under that scenario, you'd actually would pay this off even faster. So those are some scenarios to use to get your business out of debt. If you ever need help or guidance on that, we are here to help. We want to help you stay in business and enjoy being in business. And sometimes paying down debt and having that looming over your head doesn't feel great. So let us know. And of course, this tool, as I mentioned, is on insighttax.com/wealth. Remember, profit is a choice. Have the courage and wisdom to choose it.
