If you’re someone who’s fully committed to financial planning/wellness, start with yourself by breaking down ways you can build your own wealth. If you can’t put in the time and effort to do it for yourself, how can you create an interest that aligns with your clients?
To start, you must understand that there is no secret formula to get rich quickly. The goal is to break down life-changing habits that can help you develop better financial management skills for a strong financial foundation until retirement. Here’s how you can get started.
Kill Off Bad Debts
First, let’s break down bad debts and good debts to make it easier to direct where your money should go. Putting it simply, good debts are things that will accumulate value over time, such as your small business, a home, or student loans. Bad debts don’t; these are things like a recent vacation, a car, or credit card debt. These types of debt will limit your ability to increase wealth.
Why? Having debt can hurt your financial security. It prevents you from having more free income, starting an emergency fund for a rainy day, and even slowing down the process of contributing to your retirement earlier in life.
It is unrealistic for many to pay off all the debts in one go. The trick is to tell your money where to go instead of wondering where it all went. Here are two of the best ways for you to start decreasing debt.
- The Avalanche Approach: With this method, you want to short your debts based on the highest to lowest interest rates. From there, you’d want to make minimum payments on all of your debts but focus more on the debt with the highest interest rate by paying a bit more than the minimum each month. When the debt with the highest interest rate is paid off, allocate all of that money onto the next debt and so on like an avalanche. This is an excellent strategy because you’re saving more money by paying off the least amount of interest possible when you get to the bottom.
- The Snowball Method: This method is great for working with your brain’s psychology to make paying off debts less overwhelming. Just like with video games, you get positive reinforcements when a task has been completed. The same thing can be applied to paying off money owed by listing your debts by balance from lowest to highest. Like the avalanche approach, you want to pay a minimum amount on all of them; but now, your goal is to add a bit more to the debt with the smallest amount first.
When that’s all paid off, roll the extra cash onto the next debt with the highest balance. This method allows you to celebrate victories early on to keep you motivated. Like upgrading to the next level in a game, your brain will continue to chase for that success even if the levels start to get more challenging.
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