This weekend, I picked up a book by Stacy Johnson (of TV’s Money Talks fame. . .), called Life or Debt. Although the book was published in 2002, it somehow seems dated (perhaps because Stacy mentions VCR’s and Walkmans). Despite the impression that the book was written in the early 90’s, Johnson does outline a fairly common-sense plan to get out of debt. In fact, there were a few times when I wondered if he had taken some of his idea straight out of my all time favorite, Your Money or Your Life.
Here are the steps to debt freedom, according to Stacy Johnson:
Step One: Compute your average hour after-tax, after-work-related-expenses wage. Just as YMOYL suggests, we need to find out how much we really make on an hourly basis, after taking commuting costs, food expenses, and clothing costs into account. Johnson includes his own instructions for doing this:
· Write down your annual salary
· Multiply this number by .7 (to account for taxes)
· Add up all the expenses (gas, food, clothing) associated with your job every year; subtract this total from the number in line two.
· Divide this new number by 2,000, the average number of hours a person gets paid to work every year. This is your true hourly wage.
Step Two: Inventory your possessions---everything, from the contents of the garage, to the attic, to the pots and pans in the kitchen. Write it all down.
Step Three: Go through the inventory, and make a mark by those things you purchased but didn’t really need or didn’t use. Do you really need two cars, three cell phones, two lawnmowers? Tally the total cost of the things you bought but didn’t really need. Multiply this number by 6.7, which will tell you the opportunity cost of these items. The opportunity cost represents the amount that you would have gained had you invested that money for 20 years at 10%. So, a $250 lawnmower you rarely used because you borrow your neighbor’s riding mower instead would have been worth after 20 years.
Step Four: Find items on your inventory list that truly meant something to you. Johnson’s example is an old backpack that took him through many countries. This exercise is meant to help you refocus on what is really important in your life.
Note: steps one, two, three and four are almost identical to information presented in YMOYL.
Step Five: Determine your 'Debt Destroyer'. Multiply your annual income by .10, then divide by 12. This is the amount that you will use each month to pay down your debt (in addition to your minimum payments).
Step Six: Finding that 10%. To figure out how you’re going to find that 10% for debt repayment, Johnson suggests writing down every penny that leaves your hands. Once you know how you’re spending your money, you’ll have an easier time finding ways to save (this is the ‘Latte Factor’ in action).
Step Seven: Begin eliminating debt, by:
· Not creating any more debt
· Ranking debts in order of fastest possible payoff (divide total amount owed by minimum payment; the lowest number is the first debt to repay)
· Build a ‘Debt Destroyer’---this is your extra 10% payment from step five.
· Pay off your debts, using the Debt Destroyer.
· When all debts are paid off, invest the Debt Destroyer plus the total of all of your old monthly payments.
I would characterize Life or Debt as a combination of ideas from Your Money or Your Life and Dave Ramsey’s Total Money Makeover, without the radicalism or the religious undertones. It’s a good book for someone who hasn’t read much else about debt reduction, and who is highly motivated. Personally, YMOYL and TMM both inspired and motivated me more than this book did, and I would recommend those over Life or Debt.
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