Podcast

In honor of Allissa paying off her massage school debt (YIPEEEEE!!!) we unpack the ins and outs of the debt snowball and how it works.

Resources referenced:

• Allissa’s Happy Dance
• How the Debt Snowball Method Works (from Dave Ramsey)
• Undebt.it
• A bunch of our money posts

Sponsors:

• Jojoba
• GiftUp!
  

Transcript:

Michael Reynolds Hey, everyone. Welcome to the Massage Business Blueprint podcast, where we discuss the business side of massage therapy. I’m Michael Reynolds.

Allissa Haines And I’m Allissa Haines.

MR And we are your hosts. We’re glad you’ve joined us today, because — especially today — because I am beyond excited about our topic today. I am so excited. I just — I’m not even into banter. I’m just going straight to it, because I am so excited.

AH Michael is geeking out. Go ahead, tell them.

MR [laughing] We’re going to talk about the debt snowball.

AH The debt snowball. Yay!

MR Just in time for winter.

AH Just in time for winter and snowman season, we are going to talk about a debt snowball. What is a debt snowball? We’re going to leave you in suspense for just another second, because you know how I like to start everything with my little story about why we’re doing stuff.

MR Go for it.

AH So last week I paid off my massage school student loans. Woo!

MR Love it.

AH 12 years ago, I took out a loan — of I think it was $16,000 — to cover massage school and every little thing that went along with it. And I am mildly embarrassed that it took me 12 years to pay it off, but I only got my money crap together 5 years ago. And in that 12 years that it took me to pay off, I started a business; I divorced my spouse, all of a sudden had to live on my own self-employment income, and I learned a whole bunch as many of you who go through major life changes in your 30s. So now I’m 42; I have paid off my massage school student loan, with a bulk payment even, last week. And I did it using the debt-snowball method.

So let’s talk about what the debt-snowball method is. We’ve got lots of blog posts, and I think we even did a money webcast, and we talked about zero-based budgeting. And I’m going to put a link to a bunch of our money posts in the show notes here; so you can go to massagebusinessblueprint.com/podcast; I’m going to have a bunch of links and resources. But let’s jump into debt snowball. So in a nutshell, and we’ll give some examples too, the debt snowball is a method of reducing your debt where you pay off your debt in the order of smallest to largest. And sometimes that seems weird because we think we should pay off our debt based on what the interest we’re paying is on any particular debt, and sometimes that makes sense. But the debt-reduction strategy, this debt snowball, allows you to get momentum. So you pay off in the order of smallest to largest, gaining more and more momentum as each little balance is paid off. When the smallest one is paid off in full, you roll that money you were paying on the small one into the next biggest one; so — or the next smallest one, pardon me. So there’s very clear steps that our friend, your friend and mine, Dave Ramsay lays out, and I’ll put a link to some of his debt snowball resources. But in a nutshell, one, you list your debts from smallest to largest, and then, two, you make your minimum payments on all of the debts except the smallest one, where, step three, you pay as much as possible on your smallest debt. And then you keep doing that until each debt is paid in full. So you’ve got to figure out your monthly bills and your fixed expenses, including the minimum payments on each of those debts, and then you figure out how much extra you can pay down on your debt each month. And this is where you start thinking about — we did a podcast a couple weeks ago on how to come up with extra money fast and make a real dent in your debt or just come up with extra money real fast. This is side hustles, this is —

MR Selling some stuff…

AH — selling some stuff, sorry. Lost my train of thought there…

MR [laughing] I can read your mind. It’s okay.

AH This is about pushing yourself a little extra in different ways to come up with a certain amount of extra money every month to put toward your debt, because you want to build a better future for yourself. Michael, before I get into the example, what have I missed? What do you want to clarify and impress upon?

MR I don’t think you missed anything. I cannot help but impress upon and kind of reinforce what you said, which is it’s not about the interest rate, because everyone gets hung up on the math. They always say, “Oh. Well. Interest rate, interest rate, interest rate.” Well, yeah, okay. Mathematically, if you pay off the highest interest rate first, you might save a few bucks. And by “a few”, I mean, maybe, 50 to 100 bucks over the course of your debt. It’s not that much. It — most people get really hung up on the math, when it’s really — math is not their problem. Their problem is the motivation, the intensity, and the momentum. And that’s what the debt snowball gives you is that intensity, motivation, and momentum to modify your behavior to actually get it paid off. So I just want to reinforce that.

AH Sweet. And I’m going to give a little bit of an example. And you’re listening to this; so this is a lot of numbers. You don’t have to be doing this math in your head. You’ll get the theory at the end, and there’ll be a whole bunch of resources, and I’ll lay out this example again in the podcast notes. Michael, and I’m going to ask you to look up what episode number we’re on so that we can refer people right to the episode number when they’re looking —

MR We’re on Episode 120.

AH Sweet. So just go to massagebusinessblueprint.com/podcast and look up the episode number that I already forgot that Michael said.

MR 120.

AH [laughing] Here we go.

MR I’m here for you.

AH Yay! So here’s the example. And this is a really realistic example based on people that I talked to and people like me. And a lot of us are in similar situations where we have a lot of debt we shouldn’t have, and it seems terrifying to get out of it especially when you’re self-employed, especially if you’re self-employed and single, or self-employed and you got a family to support. So let’s say you’ve got $7,000 of credit card debt, and that’s from start-up costs and that time your car needed new brakes, and you weren’t good at budgeting yet. And your minimum payment on that is 150 bucks a month. And then, maybe, you’ve got $2,000 of your massage school loan, and your minimum payment is $75 a month. And then you’ve got that $500 on a Kohl’s card, that department store, because you felt bad that you couldn’t buy everybody lots of Christmas presents last year, and you opened up a Kohl’s card, because oh my God, Kohl’s bucks are awesome, and you ended up getting that sweater for $2. So your minimum payment on that is 50. Now there’s a whole lot of bad decisions in a lot of this debt that we’re talking about. We do not need to beat ourselves up. Acknowledge that perhaps previously you weren’t great at budgeting or learning about money and how to spend your money, but you’re better now; so let’s just let go of that and move forward.

And before we get into the math about how to pay down that debt, hey, let’s talk about our halftime sponsor, Michael. Michael, who’s our halftime sponsor today?

MR Our halftime sponsor is giftUP, a brand-new sponsor. I’m actually pretty excited about because we’ve had a lot of interest in this specific service.

AH We have.

(sponsorship announcement at [8:15])

AH So — all right. You got 7 grand in credit card debt, you got 2,000 massage school loan, you got 500 on that Kohl’s card, and that beautiful sweater. And now you’ve figured out that you can pay an extra $200 a month toward your debt because you got one shift a week working at a different massage place, or you’re delivering pizza, or you decided to do some babysitting on the side to make some extra money and put towards debt. So the first couple months, you’re actually putting a whole $250 into that Kohl’s card. You’re putting that $200 extra that you have every month from your side hustle, or whatever that source is, plus the $50 minimum payment on your Kohl’s card that you’ve been paying as part of your regular monthly bills. So it’s only going to take you about two months of $250 payments, and that Kohl’s debt goes away. You close the darn card; you don’t get tempted when Christmas comes around, because now you realize how hard you have to work to pay off your Kohl’s debt. So awesome; Kohl’s is gone.

So then you’re going to focus on the next debt, which is your massage school loan. So you’ve already got your $750 — oh, pardon me. You’ve already got your $75 minimum payment every month going towards that, and now you have that extra two fifty a month that you were putting on the Kohl’s card; so now you’re funneling $325 a month into your student loan, and that student loan’s going to be gone in about seven months. So you’ve got these rewards with this snowball system. You’ve got these rewards happening fairly often — enough to keep you motivated, enough to help you resist that breakfast sandwich served to you through your car window five mornings a week — Allissa, I’m talking to you. And you can really feel good and rewarded about the extra work you’re doing and the extra budgeting and paying down this debt.

So now your student loan is gone, and you do a little video happy dance that you broadcast all over your social media. Yes, I’m talking to you, Allissa. And now you can focus on that credit card debt. So you’ve got the $150 minimum payment that you’ve been making all along, and you have that $325 that you were putting toward your massage school loan; so now you’re making a $475 extra payment every month. And that $7000 credit card debt is going to be gone in 16 months, which seems like forever, but there’s a few things to remember.

One, if you don’t start, you will never finish. So at some point you have to start that process, that 16-month payoff process. But it’s probably not even going to take you that long, because, at this point, you’re really good at this; you understand how good it feels to have one brick lifted off of your shoulder, to have one debt removed from your psyche. So you’re going to get better at budgeting; you might even side-hustle a little more, or somewhere along the way you might raise your massage prices. And I’m doing that; I’m giving myself a raise; so in two weeks I get a raise, and I will be making $75-$100 more every single week, and that money is going directly towards my debt. So you — as you — as things happen, as your grandma writes you a $50 check for Christmas, all of that goes towards your debt, and I would bet money — if I was going to bet money, but I’m not because I’m paying down my debt — that debt is going to be gone in well under 16 months. So that momentum is its own reward.

And we’re going to have all the resources for a more thorough explanation of debt snowball, although this was pretty good. There’s also a tool that I use called Undebt.it, and it’s a website where you can actually plug in all of your debt, and it even allows you to plug in your interest rate. You plug in your minimum payments, and it lets you configure your debt snowball in a couple of ways. You could do the typical debt snowball, that is the smallest amount first, which Michael and I highly recommend. But if you’re freaking out about a particular interest rate, or you have two debts that are super close in their balance, you can actually manually reconfigure it. Or if you owe your mom money, and you really want to pay that off first, you can use this program to help configure it that way. You can choose your priority and reconfigure that way, and it will help keep you on track. It’s a great resource. And there’s a couple others we’ll put in the resources, too, as we think about this more. All right, Michael. I’m done. What do you got?

MR I would add one thing, and that is the “why” behind getting out of debt. It seems like a really silly question or a silly concept because it’s so obvious to most of us. But a lot of people say, “Well, why, why should I care so much about getting out of debt?” And, first of all, you’re right; the psychological burden that is lifted when you get this debt payed off is phenomenal. But, really, more importantly, debt sucks away your income. When you have your income coming in, and then half of it is going out to pay credit card payments and car payments and student loans and this, that, and all this stuff, it just eats away at your income, which could be going toward saving or your emergency fund or your retirement plan or things that matter for your future. And so we’re in this — I mean, humans by nature are very instant-gratification-oriented. We don’t think 10 years ahead or 20 years ahead. We just think about “Oh. What’s in my world today?”, and so it’s hard to picture what that world looks like without debt sucking away your cash flow. But the reality is the more debt you have, the more it just eats away at your ability to save for the future and take care of yourself and your family by investing properly. So the “why” behind getting out of debt is really, really important, because most — I shouldn’t say most, but a lot of people stay in debt their entire lives. I would guess it’s actually most people, to be entirely honest.

AH It is most people.

MR They stay in debt their entire lives. And they get to 50, 60 years old, and they’re still making credit card payments, and they’re still making car payments, and still making this-and-that payment. They will wish they had been able to save more money, and so when you think about that, don’t let that be you. Don’t let that be — don’t become the person that gets to 50 or 60 or 70 years old and wishes you had made different choices 20 years ago. So I’m really getting soap-boxy now; I need to shut up, but that’s the “why” behind this debt snowball.

AH You know, I got to say — and we have different perspectives on this because we have different lives, and you’re a man, and I’m a woman, and you’ve been self-employed since you were 16 —

MR In college, yeah.

AH — and I — and you waited until a little bit later in your life — until your mid-30s to get married and have kids, and I was consistently employed. I got married when I was 26, and a large part of when I got married was because I was financially unstable and nervous about that as I came into adulthood. And then becoming single at 31, 32, while — no, I guess it was 33, while I was 2 years into building my massage business, was terrifying. And to do that with a bunch of debt, and to leave that marriage with a bunch of debt was terrifying; it was crippling. And I knew that I was never going to be hungry or homeless, that I had enough of a support network that that wasn’t an issue. And I don’t — I didn’t have children; I don’t have children; so that certainly makes my situation much easier than lots of people who do this with kids. But the process of becoming financially literate and — learning how to manage my business and personal monies properly and paying down this debt, there is nothing more empowering. It is remarkable how rewarding and how good and how bad-ass it feels to — I love paying my bills every month now. I still have a good chunk of debt; I’m probably 14 to 16 months away, if everything goes really well. If everything doesn’t go really well, I’m probably 24 to 36 months away from paying off my debt. But it’s ridonkulously empowering as a business owner and as a woman to be financially literate and know that I am on a path that will allow me to be financially independent and never have to — not that I ever had to, but never be wooed into partnering or marrying or making stupid decisions because of financial fears again. It is unreal. And this is a whole other podcast that I’ve kind of got some notes on, because it gets a little hippy dippy —

MR Preach it.

AH — [laughs] Yeah. I will. We’ll do it. But I also want to point out: When you get really good at this stuff, and I’m not really good yet, and you start to share that with other people — and Michael actually helped me set up a Roth IRA for myself and also helped me set one up for my 21-year-old-niece — my 22-year-old-niece. And to see her face and to have a conversation with her after she set it up and started to comprehend the value of a Roth IRA as a 22 year old made it worth it. So if you’ve got kids or you’ve just got young people, getting this crap together and then being able to share it with people who are much younger, who are going to benefit long term from investing and whatever, oh my God, it makes it all worth it. So get your hustle on; read these resources at massagebusinessblueprint.com/podcast; look for Episode 120. I kid you not, this will take a weight off of your shoulders and make — really, what’s our mission? To make massage therapists make more money and live happier lives? This really will do it. All right. I’m done. I had a little more coffee than I anticipated; my apologies.

MR Oh, that’s okay. Because I lied; I have one more thing.

AH [laughs]

MR [laughs] Mine is not nearly as inspirational; it’s more clinical and technical here. But I want to point out one thing that some people kind of get mixed up about — actually, two things. One is you do not count your house payment in your debt snowball unless you are further along. So if you are aligning with the Dave Ramsay philosophy, which I do, the idea would be to count all of your debt except your house payment. So if you rent, forget the rent; it’s not in the debt snowball, obviously. But if you have a house payment, like a mortgage, do not count that in your debt snowball; get all the other debt paid off first, then you do your emergency fund, then your retirement, and then you start chunking away a little more of the house if possible. But the house does not — it’s not labeled the same way as other debt; it’s not as bad as all this other debt we’re talking about. So the house debt you leave kind of in its own separate category while you’re doing debt snowball. The second thing I want to point out is some people — I don’t know why, but some people don’t count their car payment as a debt. That’s a debt; that counts; your car payment — you don’t get a pass on your car loan. So any debt besides your house. So this means student loans, credit cards, car loans, any other kind of loans besides your mortgage counts in your debt snowball. I want to point that out because I’ve heard some people say, “Well, my — I’m out of debt except — I’m out of debt,” and they really have a car payment and a mortgage. And I’m like, “Well your car payment counts.” “Oh really? But people always have a car payment.” No, no.

AH Nope. I actually paid my car off four months early. I paid it off at the beginning of the summer, and it was — and for some reason it wasn’t as — it felt great, of course — it was actually the first car I bought on my own without any help from any man, and got a great deal on it —

MR Woo!

AH — and my car guy was like, “This is a good car. Get it. Yeah.” So I guess I did get help from a man, but whatever. I felt great about it, of course. I’m like, “I paid my car off early.” And I made sure everyone — when I went to the bank to make the last payment, I made sure they knew I paid it off early so I would get a lot of congratulations. But something about paying off this massage school loan was so different and celebratory, and I’m totally going to post the link to my little video dance that I made for my — yeah —

MR That was awesome, by the way.

AH Yeah. It was great. And it’s gotten more congratulations than anything else I’ve done in my career, I think. [laughs]

MR [laughs]

AH But know that this is possible and know that you can contact us with questions. We love talking about money; so email us at podcast@massagebusinessblueprint.com if you have more questions about this. But we’ll put up a bunch of resources in the notes as well. And I’m really going to be done talking now.

MR Here’s what’s cool about the car payment: So once you pay off your car and your debt snowball, of course, take that money you were spending for a car payment and put it into a separate savings account and label that account “Car” or “Automobile” or whatever you want to call it. And then in a couple of years, you’re going look up and you’re going to be able to pay cash for a car — for your next car, and you’ll never have a car payment again. So think about that when you get that car paid off. Don’t think about “Oh, well, next time I get a car, I’ll go back in debt.” No, no no. Start saving your money now and build up a savings account so you can walk into a car dealership, write a check for cash for a car, and drive it off with no debt. Think about how amazing that would feel. So —

AH I mentioned this on the podcast before, but I have a client who buys a Lexus — he buys a new Lexus every two years — he’ll buy a new model; sometimes he waits three years. And he puts in on his Amex, gets all of the points, and then writes one check to cover that Amex bill. And he is my hero. When I buy my Tesla, that’s going to be how I buy it.

MR Well, we’re probably a couple of months away from affording Teslas at the blueprint here, right?

AH No, no, no —

MR Call it the Tesla fund.

AH — long way away from that [laughs].

MR Like 200 years away from that?

AH Yes, exactly. But, yeah, it just — it feels good, people. It feels so good that I have actually resisted breakfast sandwiches since I made that payment because I want to pay my next thing off even faster. So, there you go.

MR When Allissa and I say no to food, you know we mean business.

AH Yeah. I’m not messing around here. All right. I’m done, Michael. For realzies.

MR I think I’m done, too. For realzies. All right.

AH Thanks for sticking with us, people.

MR If you’re still around, thank you. We appreciate it. So we’ll wrap up for today, right there. A reminder, our website is massage businessblueprint.com. We have a lot of stuff for you there. We have some free stuff as well as a premium member community, which is awesome. I think we’re up to 200 members now; we kind of broke that 200 member mark, and our Facebook group is getting smarter and smarter every day with all our new members; so check it out. If you have a question or a comment or a topic for us to bring up, email it to us at podcast@massagebusinessblueprint.com. And we always appreciate you telling your other massage therapist friends about us and leaving us iTunes reviews. That makes us smile and warms our hearts; so we appreciate that. Until then, have an awesome day. We’ll see you next time.

AH Bye.