How to pay off debts and find financial stability in 7 steps

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

No fraud, sports betting and extreme savings.

Half of Russians have outstanding loans. People do not go into debt because of a good life: many simply do not have enough money to buy household appliances, for treatment, repairs, or even food. At first, loans seem like a good way out, but in the end they only make the debtor poorer: 13% of Russians spend 40-50% of their income on monthly payments.

Paying off your debts means significantly improving your financial situation.

And for this, first of all, you need a working strategy. Dave Ramsey, financial expert, TV and radio host, author of several books, came up with a plan that consists of seven "baby" steps. Here's how to use it.

What is the essence of the system of children's steps

The path to financial freedom, according to Ramsey, consists of seven "childish" steps. But they were not called that because they are light. Vice versa. When a child learns to walk, the first steps are very difficult for him. As well as an adult who is just learning to live without debt and manage his finances.

The seven-step system was invented in the United States, but people around the world use it with success. Including the Russians. The technique does not reveal any magic secrets, does not offer miracles, tricks and shenanigans - it just helps to set a goal, motivates and teaches you to correctly distribute money and energy.

How to get rid of debt using this system

Step 0. Secure your "four walls"

At the beginning of the path to financial freedom, Ramsey recommends making a firm decision: never take loans again unless absolutely necessary. He advises you to cut and throw away your credit cards, and promise yourself not to pay with them for online purchases. Once the decision is made, secure your four walls.

That is, make sure to pay for all the essentials: for example, housing, medical treatment, study.

Deposit money for renting an apartment, pay off debts for housing and communal services. If a car or an important household appliance breaks down, pay for the repair. Solve acute health problems. So that all these expenses do not distract you in the future.

Step 1. Collect $ 1,000

At first glance, this step seems strange. Why save money if it would be more logical to start paying off all debts right away? But this small reserve fund is needed to hedge against contingencies.

If in the near future you urgently need money, then instead of breaking your promise and taking out another loan, you will use your savings.

Plus, stock will help you feel calmer and more confident. And this is necessary to move on.

Step 2. Pay off all debts except the mortgage

To do this, Ramsey proposes to use the snowball method - that is, to extinguish debts and loans from the smallest to the largest. Let's take a quick look at this model with an example.

Let's say you have two loans: for a refrigerator with a monthly payment of 2,000 rubles and for repairs with a payment of 5,000. You start by trying to pay off the loan for the refrigerator as soon as possible: take more work, save all the extra money, even 100 rubles, you put on a credit account. Most likely, this will help you pay a little faster.

But when the loan is paid off, you do not relax. 2,000, which were given for the refrigerator, add to the payment for the repair. Thus, you also repay the second loan faster, because you pay monthly not 5000, but at least 7000 rubles. If you still have debts, you continue to pay them off using the same algorithm.

The snowball method is sometimes criticized and suggested to use the avalanche method instead. Here everything is the other way around: debts are repaid from the highest (priority) to the lowest.

It is believed that the avalanche method will help you pay off debts faster, while the snowball method will allow you to do this in a more relaxed and comfortable way.

Step 3. Create a contingency fund for 3-6 months

When you have paid off loans, do not indulge in all the bad things and do not start to overspend. All the funds that you spent on monthly payments and other amounts that you managed to earn or save, you now use to create another stock.

This time, such that if you lose your job or get sick, you can live on this money for at least three months. The logic here is the same as in the first step: savings will save you from new loans in the event of force majeure.

Step 4: start saving for retirement

The author of the system is an American, and the US pension system is different from ours. But both in America and in Russia far-sighted people try to start saving for old age as early as possible. For us, this is even more relevant: relying on the state in this matter is tantamount to being in poverty.

Some of the money that you gave to create an emergency fund now needs to be set aside for retirement.

It is recommended that you start with 15% of your monthly income and try to increase this figure. You can put funds on a deposit or buy securities with them.

Step 5. Save up for education for children

For Russians, this step may not seem so important. Although a few years ago, the share of paid education in Russia approached 40%. And it is skyrocketing, as is the cost of training. Therefore, it would be nice for parents whose children are planning to go to university someday.

Funds that used to be used to pay off loans using the snowball method, at this stage you start saving for the education of your children. Excluding the money that you save for retirement.

If you don't have children, you can set aside funds for your own education or for something else that seems very important to you. Or just skip this step.

Step 6. Pay off your mortgage

Now you have an emergency fund, you have saved up funds for the education of your children (at least for a couple of years of study) and are used to saving part of your income every month. Perhaps previous successes have motivated you (like many of those who have been helped by this system) to treat money more wisely, to look for new sources of income.

Then Dave Ramsey recommends following a familiar algorithm. The amount that you set aside for education, and any additional income, at this stage, you need to add to your monthly mortgage payment in order to pay off on it as early as possible.

Taking into account the Russian realities, the fifth and sixth steps, perhaps, should be reversed: first, pay off the mortgage, and then save up for education. If you did not take out a mortgage, you need to skip this step.

Step 7. Enjoy financial freedom

At this stage, you are free of debt and you have enough savings to not be afraid of unforeseen circumstances. The main thing now is to keep your promise and not go into debt anymore. And, of course, keep saving on what matters to you: retirement, real estate, travel, investment and business.