in value anyway) but rather lots of different things here and there without any real system in place to manage money.
In short, you may have suffered a death by a thousand cuts and you have been systematically overspending. Don't you just love consumerism?
If you are in this situation, I want you to pretend that the new CEO of You Inc. has a mess on their hands. The business needs to run as usual, which is why you can't simply stop paying rent, mortgage or grocery bills to throw 100 per cent of the available money onto the debt — if you do, the business will stop functioning. The first thing the new CEO must do is put a working system in place, even if this means that the balance sheet (the financial statement of a company — in this case, You Inc.) has some debt that needs to be cleared. It takes time to fix a mess. It's understandable that it will take at least a few pay cycles for the new strategy to be installed and to take effect.
Think about this: you're on a boat and there's a slow leak. What's more important? To start bailing water out because you're worried that your feet might get wet or to stop the leak? If you spend time stopping the leak and fixing what caused it, it's okay to have a bit of water on your feet. I understand that some of you might be up to your neck in water, but it's still more important to stop the leak and put a system in place to ensure the cause of the leak can never happen again.
My point is that there's no sense simply paying down debt until you first decide that you're not going into any more debt (as we saw in step 1) and now you are going to work on yourself and the systems in place. I'll show you how to get a money system in place in chapter 4, but I want you to know that dealing with habits and behaviours takes time and that's totally fine because this time you are now serious about getting out of debt.
Step 3: focus on building an emergency fund
You've come a long way. Yes, it's been small steps — purchasing this book, being keen to change and hopefully being challenged by steps 1 and 2 — but you've decided that enough is enough, and it's time to do things differently.
That's if you have totally agreed with changing your mindset around debt. Remember, there is no rush here and I will celebrate with you on any movement you make. It can take time. It's okay.
You don't want to fall back into debt once the debt repayment campaign has started. The reason why steps 1 and 2 have to be completed before step 3 is because we're about to get drastic.
You are now going to move all your debt repayments (including your mortgage, car loan, personal loans — everything!) to minimum payments only and focus on getting $2000 saved as an emergency fund in a dedicated online savings account.
Once your money system is in place and your debt is on minimal repayments, the leftover money will be going to building your emergency fund of $2000.
It's okay if you're paying a bit of interest while you build your emergency fund as the first step to getting out of debt (step 1) is to not take on any more debt. This emergency fund, or cash buffer (or whatever cute puppy name you want to call it), will be the first line of defence to stop any more debt should unforeseen events arise while you're on the way to setting up your financial plan.
It may seem counterintuitive to slow down the debt repayments and pay a little bit more interest while you build your emergency fund, but believe it or not, interest is not your problem. The fact you have systematically overspent without any systems in place and without self-control is the actual cause of the problem. If you don't believe me, take a look at some of the inaccuracies people believe.
This is the worst excuse that someone might need to emotionally hang their little debt hat on. The worst time to go into debt is in an emergency. The people who use this excuse literally have no comeback when I say, ‘All you need is your own cash fund for emergencies’. Credit cards aren't the answer — they're a middle-class fallacy.
This one comes soon after I shoot down the ‘credit card for emergencies’ logic. I proceed to ask people, ‘When was the last time you needed, say, $1000 the same day for an emergency?’ It just doesn't happen. ‘But it can take a day to transfer money from my savings!’ Nope, I won't buy that excuse either because the new payment platform that allows instant transfers between banking institutions killed it. If there was an emergency and you did need serious money over your usual daily spend, find some internet access and make a transfer. Call your parents or a good friend. There are many practical solutions to the fictitious emotional crutch of your credit card.
I am picking on credit cards here in particular as they are the usual suspect people hang onto when I talk about emergency funds.
If you're like me and you've reached a point where you find you either can't control yourself with your credit card (hello!) or you have debt that you can't shake, you know that credit cards are not a blessing and you don't give a crap about the ‘points’. Also, most people who play the points game aren't frequent flyers. If you go overseas once every two years, I've got news for you: you're not a frequent flyer.
Practical steps for your emergency fund
I don’t want you to have to use your credit card for emergencies that could disrupt your debt repayment strategy, such as car insurance excess or emergency dental work. If you use money in your emergency account for an emergency once your debt repayments have started (next step), press pause on paying down your debt (except for the minimum repayments) and work to top it back up to $2000. The cool thing here is getting an emergency fund in a separate account may be the first time ever that you have had some decent money saved.
You can find out more about the emergency fund, what counts as an emergency and all the other logistical questions about emergency funds in chapter 3.
Step 4: commence the debt snowball
Did you know it's not your intelligence or logic that got you into debt to start with? It was your habits and behaviours. It's not smart or logical to have debt for stuff that you consume and then have the pleasure of paying interest on it while tying up your cash flow and adding extra financial stress to your life. I am aware that people can end up with debt due to a situation outside of their control. But I am about to have a go at the former category of people (intelligent and logical). I feel I need to be a bit brash when talking about the debt snowball strategy because it may feel like it conflicts with your own intelligence, logic and reason. So I need to get your attention.
I am about to ask you to pay off your smallest debt first, regardless of the interest rate.
Now, you might be thinking that it doesn't make sense to pay off the smallest debt first if it has a lower interest rate than another debt. Truth is, it makes
