Brad and Jonathan dive into tactics to optimize both your health and your debt. The goal is to simplify your finances and your health by stacking multiple optimization tactics together.
Make small changes in your life, that when done over many months and years are going to add up to a better life.
Cutting Through The Noise Of Health Optimization
Around the country, Americans are realizing that we need to change what we have thought about healthcare for the last 30 years. Instead of relying on our medical system to fix acute problems as they arise, we should make sure to take preventative health measures for our body.
You need to figure out what works for you. There is no blanket advice.
Simple changes could be something as small as switching from olive oil to avocado oil. You could completely remove soda from your life and replace it with water. There is a myriad of choices you can make for your health and it is okay to try something new. Make your health decisions based on the best information you can find. Even if the best available knowledge changes decades from now, all you can do it work with the best information available at that time.
Simplifying your approach to health can lead to positive changes. For example, if you follow the Micheal Pollan's advice of “eat food, not too much, mostly plants,” then you are probably going to move towards a healthier lifestyle. When you choose to look at life, or dieting, through the lens of simplicity, you are never going to regret that.
Remember, it is your responsibility to create a healthy lifestyle for yourself. Nothing that doctors can do will replace a healthy lifestyle over a lifetime.
We are horrible at preventitve medicine, and I don't think that's a systemic failure. I think instead it's a fundamental misunderstanding of responsibility. Doctors, nurses, medical teams, there is nothing they can do that can replace a healthy lifestytle. You have to take personal responsibility.
If you are constantly working to deprive yourself of food, then your diets are more likely to fail. The same concept applies to the FI lifestyle. If you are constantly depriving yourself of fun or self-care, then you are more likely to burn out.
If you look at life through the lense of simplicity you are never going to regret that… if you are following Michael Pollan's basic guidelines, ‘Eat food. Not too much. Mostly plants.' you're likely going to be good to go.”
Remember that your approach to dieting and FI should be unique to you and your goals. Find the path that works best for you.
How To Get Out Of Debt
Today, we continued our conversation about getting out of debt from 115R. Many people arrive in the FI community with financial baggage that needs to be cleared up before they can move towards FIRE. Brad and Jonathan discuss different types of debt and how to tackle them with Gina Pogol from AmOne Corp.
Types Of Debt
With secured debt, the borrower pledges an asset that the lender could take back. An auto loan or home mortgage would be an example of secured debt. Government-backed student loans are also a form of secured debt that you cannot discharge through bankruptcy.
If you defaulted on a secured loan, then the lender would repossess your home, car, or other pledged asset.
With unsecured debt, there is nothing for the lender to take back. The lender only has your word and signature that you will repay the loan. It is riskier for the lender which leads to higher interest rates and more hurdles for the borrower to secure the loan. With unsecured debt, your credit score holds more weight in determining your interest rates.
Examples of unsecured debt are personal loans, credit cards, and some student loans.
Although the debt is unsecured, you cannot just walk away from unsecured debt. If you are not making your payments, the lender could sell your debt to a collection agency which will lead to a barrage of phone calls. Plus, the lender could sue you for the right to garnish your paycheck or even get a lien on your house.
However, if you filed bankruptcy, then you would be able to discharge unsecured debt.
Revolving debt allows you to charge up to a predetermined amount via a line of credit or credit card. Once you make the charges, you have the option to make minimum payments on that debt. Gina advises that if you are just making the minimum payment then you will likely take decades to pay off that debt.
An installment loan is a set term that requires you to repay the loan within that timeframe. Unlike revolving debt, you will know when your final debt payment date will be.
Debt Repayment Strategies
If you want to get out of debt, the good news is you have options.
First, you should list out all of your accounts. Write down all of the amounts owed, the minimum monthly payment, and your interest rate.
Once you know what you are working with, then choose a method that works best for you.
If you are motivated by instant results, then this is a good option.
Take the smallest balance and funnel all of your resources into that debt. Only make the minimum payments on the rest of your debt as you work on this smallest loan. Once you have completely paid down that balance, then work on the next highest balance. Keep going until you have no debt left.
If you would prefer to minimize the interest that you are paying, then the avalanche method is the way to go.
Start focusing all of your resources on the debt with the highest interest rate. Once you have eliminated that debt, then move on to the next highest interest rate until you are debt free.
Debt consolidation can accelerate your debt repayments and increase your credit score quickly. Basically, you can replace all of your open-ended debts into a single loan. Typically, you can find a debt consolidation loan with a lower interest rate than your current outstanding debt.
Debt consolidation is a fantastic tool for the right person. It can really accelerate your debt repayments. It can increase your credit score almost immediately. It gives you a finite end to your repayment…you are replacing all your open ended debt with a single loan. One payment. Which makes budgeting much easier.
One bonus of debt consolidation is that it could help to increase your credit score. With a debt consolidation loan, you are lowering your credit utilization ratio which accounts for 30% of your FICO credit score. When your utilization rate effectively drops to zero, then your credit score can rise very quickly.
Home Equity Loans
Many people use home equity loans as an option for debt consolidation. The low-interest rate and the long-term loan can make it an attractive option because your monthly payments will be so low. However, the drawback is that you will end up paying a significant amount more interest over the lifetime of your loan. And, importantly, if you can't pay your house can be foreclosed.
Personal loans typically have interest rates that are lower than your credit cards. You can find personal loan terms for terms between one and five years. When you sign up for this kind of loan, you will know exactly how much longer you will be in debt. Plus, you will know that no one can come and take your home if you cannot make the payments.
If you choose this option, then make sure that you can afford the payment. Do not choose a shorter loan term with an unsustainable payment because that will not end well. Although you can discharge a personal loan through bankruptcy, you want to avoid that.
Is Debt Consolidation A Good Option For You?
If you have any unsecured debt with a high-interest rate, then you could benefit from debt consolidation. Even if you just have one credit card with a high-interest rate, a personal loan with a lower interest rate could be very useful.
One of the benefits that people prefer the most in debt consolidation is the ability to take a whole bunch of payments and convert it to one…if you have a hard time keeping track of your payments, you don't like sending that check out to 15 creditors every month, you would still benefit from debt consolidation even if your interest rates weren't lower, but the odds are that it will be.
Even if you have bad credit, many lenders will still work with you. The most important factor that lenders will look at is your ability to repay the loan. You'll have a higher interest rate than someone with a good credit score, but if you have a solid income, then you might still be able to qualify for a debt consolidation loan. And your rates will likely be lower than what you are paying on your credit cards currently.
If you could wipe out your debt through the snowball or avalanche method more quickly, then debt consolidation would be a waste of money.
Things To Watch For In A Debt Consolidation Loan
When you are looking for a personal loan, be sure to get multiple offers. Some lenders offer loans with interest rates as high as 3,600%, so it is critical to understand what you are getting into.
When you are looking at debt consolidation, get yourself a budget first, and know how much you can realistically put towards consolidating your debt…one of the biggest reasons for failure is that people come out with and unsuportable payment…The second reason debt consoliation can fail is that people don't stop spending.
With a personal loan, your fees can range from 0% to 5% of the loan amount up front.
Do not sign up for a debt consolidation loan with unsustainable payments.
Once you consolidate your debts, do not go on a spending spree. If you have a spending problem, then you should go to a credit counselor and get a handle on that before you move forward. Otherwise, you may just max your credit cards out again and now you are worse off than you were before the loan.
It will require disciplined spending to put your debts behind you. Put your credit cards in the freezer and turn off the one-click buy button on Amazon.
The most important thing to do is to take action! Get a handle on your debt and move forward towards FI. Start here.
Our growing community is excited to spread the FIRE around the world.
This is a community of people that genuinely loves the way they are living and feels that little tweaks in life make all the difference to building a better life for the next five to seven decades.
Each member is working toward a better future by stacking optimization strategies today.
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!