Debt can be a daunting topic for many people, whether in their personal or business life. With different opinions and advice on how to manage debt, it can be hard to know what the right approach is.
Financial coach Audrey Faust, who went through Dave Ramsey's certification program, found that not all his strategies aligned with her beliefs. Ramsey's approach included a case study where a couple sold their home to become debt-free, which Audrey did not agree with. She instead advocates for a more holistic view of personal and business finances, acknowledging the interconnectivity between the two.
One method Audrey recommends is the 7% rule, which suggests paying off any debt with an interest rate over 7% and investing money that would otherwise go towards debt payments for anything under 7%.
This approach allows individuals and businesses to prioritize high-interest debt while still having funds to invest and pursue new opportunities.
When it comes to credit cards, Audrey believes they have a place in both personal and business finances, as they can offer a 30-day buffer between expenses and actual cash flow. However, she advises using credit cards wisely, finding cards with the best rewards, and utilizing 0% interest offers for investing in business growth. Audrey cautions against paying high-interest rates on credit card balances and recommends paying balances in full or utilizing other forms of credit, such as lines of credit.
With the right approach and guidance, individuals and businesses can effectively manage their debt and achieve their financial goals.
For those who feel like they are drowning in debt and have no money, some action steps to take include knowing your net worth, optimizing your debt strategy, creating a budget, increasing your income, and developing an emergency fund.
The first step to coming out of that debt overwhelm is to define the number you need to have saved in your business as a cushion to run your business from month to month.
It is not your sales figures or operating expenses but what is the cash impact of running your business month over month. This number needs to be saved as a cushion that needs to become our rate reserves. Once we have that in reserves, we can start to think about how we want to allocate funds towards debt, building wealth, or getting paid.
It's important to know your net worth, which is your total assets minus your debt. This is your starting point, and it helps you focus on growing that. You can make financial decisions by asking yourself, “Is this going to grow my net worth, or is this going to take away from my net worth?”
The next step is creating a budget, this is essential because it allows you to see where your money is going and where you can cut expenses. You can use this extra money to pay off debt or save.
Increasing your income can be done by negotiating your salary, getting a part-time job, or starting a side business. Developing an emergency fund can also help you prepare for unexpected expenses and emergencies.
Overall, managing debt is a balancing act. These steps can help you take control of your finances, pay off debt, and start building wealth. It may not be easy, but even small steps like saving $50 a month can make a difference in the long run.