Debt Freeze vs. Debt Snowball: Hot Seat
As we implement profit first question comes to me regularly as well I got debt I got debt credit card dad whatever that loans and so forth I don't have to take care of my debt first and the answer is no once you implement this profit first method you must start making a profit first immediately and permanently now why do we do this because we want to get into this prophet habit so every day when money's coming in and we're doing a ten, twenty fifth allocation there's a percent show into profit and we're still trying to increase our profits as much as possible but here's the one thing that's gonna change on a quarterly basis when you take your profit out that profit distribution a vast majority of it is going to go to that because we're going to need to eradicate that and what you're going to do is take upwards of ninety five percent of distribution that comes out and it goes and hits down debt I call the death to that party uh because we need to get rid of debt but we need to stay in t...
his prophet habit now when it comes to controlling death there's two steps we need to take one's called debt freeze once call it that snowball hasn't been read or heard of a guy named dave ramsey he wrote a book called total money makeover I highly suggest that to folks other new orleans it's it's amazing book and why I believe it's such an amazing book is it talk to the psychology of eradicating debt when it comes to profit first it's the psychology and behaviour of becoming profitable and dave ramsey's book is the psychology of eradicating debt but there's really two components one is a debt freeze not going talk about and dave ramsey's things the debt snowball so kirsten was kind enough to come up here and we went through ah debt freeze we basically said here's expenses you're incurring we gotta stop this from coming continuing on the reason I call it a debt freeze is an expense is simply a debt tomorrow so if you rig your own expense today it will be a debt tomorrow so we need to stop incurring expenses. Um well I would like to do now is go over the process of a debt snowball would anyone like to volunteer to come up here? We'll talk about a debt and I have to go through your dad's going to show you how to eradicate it once and for all rina they're all right there we go let's do it um you know, I don't have my you don't have to mind ok? You know, have them anything we're going to go through off your head you have more than enough up there uh you know, what's going on up there so what's the name of your business again it's renaissance woman production okay renaissance women's productions and well I want to talk about is the debt you have could you tell me just as it comes to your mind the type of debt it is in the amount you have all it's kind of twine personal all yeah it's intertwined personal overall business school and do it all yeah that's fine okay I know it's on calm from it's uncomfortable and especially as we're in front of folks dealing this but it is very helpful so if there's anything you don't want share we can skip it you mentioned credit card debt right and you twenty thousand on a single card uh actually no it's it's actually not that much it's actually only like thirty five hundred okay I was thinking you know maybe someone else's number okay so that's great. So thirty five hundred what other kind of debt do you have um retailed it but it's very very little um it's like I think I have a target card that has like maybe fifty seven fifty dollars on earth I mean it's a really small my debts may be small but I am very scared does dead listen I don't care was a dollar if you owe it to someone it's owed right paint eso fifty bucks is well fifty bucks someone that's retail we mean retail, daleks, supplies and stuff yeah I mean like so I go to target for like getting supplies for my students for this's retail that's was his target the school okay what kind of debts do you have um I have student that guy student perfect how much fifteen thousand ok which is on deferment right now because technically I'm unemployed so technically unemployed yeah because I'm not you know I'm not employed by somebody else and yeah I'm I work for myself which I just think that that is that also upsets me that what they say that small business owners are unemployed and and they say that small business owners are more risky when it comes to paying back debts and so forth which to me makes no sense because I think working for a large corporation nowadays is the riskiest thing you never know when you get fired just one thing that share ok what what kind that we have some credit card retail student um car personal friend car car yeah how much is that uh twenty five thousand okay a print loans from friends anything with that yeah I have some bones from friend personal how much? Um just rough yeah like three thousand three thousand debt about it okay and this this to produce true for a lot of us this kind of makeup ok in our businesses and personal life gets kind of twine but were small business owners do you know the interest rates on these? Yeah roughly what's the credit card is from twenty nine point five twenty point five I know okay noah you're see something interesting here with the retail twenty nine point nine point five okay falcon down if it feels still watching right now he's like I don't think that I can disclose having twenty crowns for radio much jobs student I think it's like it's deferred right now so I think I'm just gonna guess like five five of us to make it clean five percent car hmm I don't know um I don't know. Okay you usually seven to ten yes yeah let's say eight feet high and personal no interest on personal okay, so that's us alone from france thank you, friends yeah. No hey, listen friends prince can help out let me, uh show you kind of interesting psychological phenomenon when it comes to debt before we weigh start sorting out yours it's called the, uh lender borrower paradigm and it's a simple chart like this um this is time and this is significance significant camps if you make alone if you're a lender over time the significance on the importance of game paid back increases so this is the lender and the borrower is this what means what this means is psychologically when you borrowed money from your friend the day that friend gave you three thousand dollars right? Yes it's really significant this helps a lot over time like well, I don't need the money's gone whatever you know I still homes kind of nuisance the lender that they give you the money say here it is you know how they can help out over time it's like okay, we're gonna start time paying me back where the hell's my freaking crowd where's my money and so there's this crossing point this is dangerous point right here if you don't pay a lender back by this point the emotional relationship that's why I think this is why they say never a lender nor a borrower be right because it can kill relationships after get over this point if you're in a situation where you've borrowed money and you're starting you know it's time is passing is in the best interest teo a communicate frequently with the borrower of the lender so communicate frequently in the second thing is makes installments even if it's a small so over time what will happen is natural. The national times of the bar would say I was three thousand two years ago I mean, so long ago I mean, does that mean care about him or is so long past but for the lender to realize to them psychologically is becoming a bigger and bigger deal so we need to communicate frequently and and pay back even small pieces to show an effort was a little, um communication is key communication is king with recording was that with everything whatever the communications always can yeah but it's easy as the borrowers time goes on it becomes less significant places uncomfortable it's better just not talk about it but for the lenders like why I freaking ignoring me what's going on traditional logical sense tells us when we have a debt like this what's which debt of all these debts would you pay first they would have an idea logically speaking top one right? I mean that it's the biggest debt with the highest interest rate logically john's one hundred percent right logically this is a debt you should pay for um just I'm freaking out because it's my only credit card it's matched out right? And you write so yeah, right so logically should pay first dave ramsey teaches us something different. He teaches this thing called the debt snowball ties into be able psychology this's a big debt thirty five hundred bucks for you to pay it off in one fell swoop today I presume it's gonna be impossible, right? Very difficult today very difficult today, it's a very difficult day. Ramsay suggests that we sort our debt in not in interest rates do but actually sort by amount due and put the smallest debt first to the highest so I'm going to re sort this out this is as you told it to me, re sorted out so we can you mind holding that up? Do the vanna white. Thank you, vanna. So okay, so now, um, you're if we sorted out by amount, do the retail ones your smallest one you're retails fifty dollars. Okay, the second smallest is actually that personal loan to your friend, which is three thousand. Then the credit card, which is thirty five hund, then fifteen thousand to the student, the last one's the car payment twenty five thousand. Okay, thank you. I think we're going when he argues is too effectively disregard the interest rates. Uh, now this regard him in regards to sorting it out and how you prioritize debt. The thing is, you should do everything that you can to reduce your interest rates, and maybe they feel is saying thirty percent you may be able to cut that down. I've tried to call them no, this late because I've had a bankruptcy. They're just like oh, no, sorry, yeah, yeah, it seems like there's other ways. Yeah, but yeah, get another credit card thinking maybe trans person maybe maybe I maybe wanted three credit cards, maybe that's the trick, but in addition to doing that, dave ramsey says the objective is to actually eradicate our smallest at first because we want to get emotional winds early on just like profit first, even though we're targeting five ten fifteen percent profit if we could get pearson's business just throw one percent profit next quarter that's the first win this is turning around and you start controlling the monster so we actually want to win our minds first and if we focus on this credit card debt based on interest rate logically makes sense of that first one but you're not gonna have a win for a long time and then we start getting defeated I'm never going back this is killing may and we start this downward spiral the ramsey suggests let's start our debt this way then what we do is we maintain the minimum interests requiring each one so you have been in payment on your credit card. You probably know that. What is that it's like I want to say like seventy five dollars okay, seventy five dollars uh your student loan ones this reactivated what's the minimum you know, like I want to say like two hundred two hundred guys in the car you know what, three hundred okay. Do you know the person alone? They're zero and then the retail eyes whatever basically what he said exactly what he's just is maintained the minimum so we stay in good standing with these people make those installments right? Plus the minimum by law is more than just your interest they'll cover actually paying down part of the wine then any dollar you have left you target all eradicating your smallest debt. So in any given month based on your historical income, do you believe you have three? This is five hundred six. You'd have six. Fifty, six hundred fifty dollars you could put towards your debt. Okay, so is any given month you've six hundred fifty dollars for debt that will cover all the minimums and it'll cover a payment for the retail. See? So she is six. Fifty, then there's pick the number. She could put fifty dollars here. Seventy five dollars here, two hundred dollars here. Three hundred says five, five, seventy five uh six, twenty five and she's twenty five dollars here. Now, what happens at the end of this month? First that's off the board and you get a rip a best statement? You get a light on fire and I say so you that and so do I close that card. Yeah, yeah. And you close that. Just leave it open in this freezer with some water in it and just like, let it that maybe, you know, when it comes to this credit scratches filled was telling us about that would be better to freeze it but you want him remove any temptation from getting access to right we got to get this debt under control right so you eradicate this debt but here's what happens the next month the snowball you had six hundred fifty this month support your debt now you have another fifty bucks that you would've put here but it's gone you add it to this and now it's seventy five dollars a month going toward this okay some months you're gonna have more than six fifty maybe uh nice check comes in you get another thousand dollars that comes in all that goes toward this one okay and these you maintain maintain then we cross this out now those seventy five dollars get out of this now you're banging this out one hundred fifty plus any additional stuff you have and then you wipe out this one and you see what by doing this that snowball effect you start billions emotional muscle this mo mentum of eradicating debt bam bam bam bam bam okay okay does that feel a little more empowering you leave a little more control over your debt that way yeah, it does. I'm still really concerned about the interest rate that that's really like hanging over my head yeah, I mean that is uh that almost seems like he said like organized crime um that's a significant tourist rate that thing is it's become such a focus of yours these other debts are going to start piling up right? So we need to eradicate those and then we need to get those interest rates reduce and and I think you can do both just sort your debt out this way any questions about that more importantly, any realizations about that about your own business? Yeah jason what's your thought I haven't been doing the sno ball is the problem I mean, I you have it in the book about this whole concept and so I did look at it but I didn't and I did the sorting, but I'm not taking it where after you clear out the first one you take that extra that's left over there and add it to the next one and against bigger and bigger that payment that you're making yeah instead I went okay that money's free I can use it and expenses and then I just back to the hey, I was just lost now that makes more sense on how it snowballs yeah actually snowball made sports starts building amore amore moment yeah yeah now with this money comes out of your business comes out of your operate expenses as much money as you can that that you have available you'll use re offering spence is to maintain and start crushing your debt what happens then on a quarterly basis when take this profit distribution that profit comes out ninety five per cent of profit is used as a big chunk of money now and then you use your target debt so once a quarter I called the death to that party that profit comes out and you're just hammering down debt and the key is you still need be profitable and this is where people challenge me say what? You can't get rid of all your debt, andy profit the same time I'm saying, well you're gonna have a profit have at the same time so you still every tenth and twenty fifth you started still assigned profit the money left over your opera expenses is used to maintain this, but then at the end of the quarter you take out your prophet say it's five hundred bucks or a thousand bucks ninety five percent what comes out one hundred fifty bucks boom hits your personal debt bam wipes out that student loan and under fifty bucks left and you still celebrate the key is this behavioral wiring may say, listen, I'm destroying debt awesome and I'm going out for enjoy fifty bucks on the nice nicely as a parachute I don't that's the nicest pair of shoes for fifty bucks, but doing something nice for fifty me online, maybe online, maybe it zappos I don't know maybe not I don't know maybe I spare something but but you're still celebrating with it and then the next quarter you're back into the exact same rhythm, hitting it with your operating expenses, hitting it, hitting a hitting it ninety days later next profit distribution fan that's down and so forth so that I have a quick question about um accumulating credit cards because I am recovering from bankruptcy and I am being recommended to add additional credit cards so these what the hell are credit card to use for your business? No, but I mean well, yeah, I guess like in my print business but just I guess there's just that that confusion as to what? Yeah, what is the purpose of credit cards if we're creating for ourselves away of of eliminating all debt? Right? Great, great question I personally I'm not a big fan credit cards. Yeah, the reality is ninety nine percent of entrepreneurs have credit card debt and uh and that's why I want to fill on um and there's times we need loans, capital purchase and equipment and this transcends that I see the value of credit cards being that a credit card bills your credit history and then applies these different things where sometimes you need to make an investment using other people's money but me personally I'll show you my own stuff I believe in these cards the business debit card, the the one you know here's another one my personal card which is a debit card my mp bonus card if anyone wants tio go shopping at an mp and buy yourself some food but this is the type cards I believe it it is the one here have used debit cards for their business is the same as cash and you can you can go to any uh uh you know any store that takes credit cards and you use this and the money comes immediately out of your bank the problem I have psychological credit cards is when you buy something you feel the pleasure but you won't feel the pain right you get the thing it's like hey there was no bill not really and it's thirty days later you sitting there the mail comes and you see the envelope there's a crick in the neck and the perspiration comes down like what is you open up oh why did I buy that with a debit card? You slice it and I think you see the money coming off your account in fact what I suggest two if you have a smartphone I don't know if it came in um no but I suggest you do is have your your bank text you your bank balance for your debit card every morning so I already got text this morning deleted it that really drives the pain of spending very intensely so so yesterday I bought something uh from food to eat and I saw it come out of me why think more creative live when I was here and had the free lunch um so so you want teo to feel the pain I love debit cards because of that okay, okay. So good. Well, thank you. Thanks for sharing this great this's technique we talked about um the whole psychology of of reducing debt is also cut expenses expenses again our future debt don't forget this technique of one more day where when you're considering a new expense can your business go without it for one more day? Can you go out without it for one more day and if you can you're putting off debt potentially for the future and you're accumulating profits so that will never become a debt you could pay for on the spot the half line technique is uh if you have credit card debt and you start paying down the credit card uh balance it's still very easy in the moment of need when there's panic that's going to swipe it on the credit card as you say you have a ten thousand dollar credit why you've experienced this before you ten thousand dollars you pay down the credit card and I need money well got the credit card and swipe it here's the trick if you have, say, ten thousand dollars of credit line that's maxed out and you pay it down too well say five thousand for out number sake I suggest do what I call the half line technique which is halfway between what you had ten thousand five thousand or you have it bring the credit line down a seventy five hundred you call your credit card company and say I'd like to set the line to seventy five hundred by the way they'll probably resist still say you don't need to do that why you doing that because they want you to have a beer credit line because it's tempting and whence tempting we spend and then we have to pay them more money so you could cut your credit card line by the halfway point and now if you have that temptation where you need money or something you can't max out the line to ten thousand going max out to seventy five hundred you reduce your potential to borrow from the credit cards so that's the technique now thiss kind goes in the face of what phil was teaching us he said you wanna have thirty percent uh you know to get your best credit score so this is not a credit score strategy but it is a getting you totally out debt permanently strategy so think of it that way the last thing I wanted to share with you I call it paying for your sins and this is the painful reality or an experience in your business many of us here if I had a break, even our businesses have run up some debt over the last year two chances are that means your taxes result, right? A business that doesn't make money a business that doesn't make my it doesn't get taxed that's how it works now, here's the challenge when you become profitable falling profit first you're going to start getting taxed and here's the tough day you're gonna have you're gonna have a nice profit a year this year you're going toe, uh get a tax bill from the government saying you owe money and you're gonna say but I just paid off my credit cards of that money. I don't have a profit in the the government's going to still tax you and you say this is so unfair? It's fair, it's fair you received the benefit, the tax benefit of no taxes when you were using the credit cards last year, so now you have to pay for your sins used to make up for that. So even though that profit that cash was used to pay off credit card it's still a profit. So when the government sees a profit, they get their fair share and they they deserve it so as you become profitable, if you have debt in your business right now as you become profitable unfortunately, you're going through some painful times in the profit first method this isn't an overnight fix you're not going to be super rich in a day or two, it may be a year or two or three years and you may have to pay if you have enough debt you made to pay for your sins for two or three years so even though profits coming into the business and you're whacking out that and getting tax on top it that's the process bye will tell you this once all this debt is wiped out this is this is the most beautiful day of your life that that way is off of you. A friend of mine told me there's only one thing scarier because he was attacked by a bear he's an outdoor survival, he said one thing scarier than being chased by a bear hey says its debt because this sticks he goes the sticks with you every single day you wake up with this, you gotta bet with this he was a bear it's five seconds that overhears this is really painful it's really painful, but this sticks around forever and I'm telling the arena the day we wipe this last one out and yes, we're going to have to pay taxes because you will be profitable but paying down debt the days has wiped out your next profit distribution all goes right into your pocket and that's the time you could get those nice shoes.