Step 1:
Debt reduction & emergency fund
Debt reduction and emergency fund for turbulent times.
We show you what to watch out for!
Debt Reduction – the debt snowball method from Dave Ramsey
Consumer debts (car, credit card, etc.,) but also student loans must be paid off by you as soon as possible. These debts and their interest represent pure expenses that consume your financial capital on a daily basis. Debt reduction? Use Dave Ramsey’s debt snowball method.
Debt Reduction: This is how you do it!
With the tried and tested debt snowball method, you pay off your smallest loan first:
Credit Card debt
Total: €10.000
interest rate: 18%
Car loan
Total: €4.000
interest rate: 4%
Student loan
Total: €20.000
Interest rate: 6%
With this method, you pay off the car loan first in full, then the credit card debt, then the student loan.
Important!
the interest rates are not important and should be ignored.
The reason why is the positive psychological effect of each loan repayment. According to research, reducing the number of loans is more important than focusing on interest rates.
Goal
Reduce your monthly expenses to the necessary minimum and continuously repay the selected loan. For the car in this example, approximately €80 per week is enough to pay off the debt in one year! You will find that quickly eliminating the car loan is more beneficial than reducing your total debt from $34,000 to $30,000.
Exception
People with a strong mathematical disposition or way of thinking can of course also use interest rates as a guide. However, repaying loans in order of their interest rates is the more difficult path for the majority of all borrowers, despite leading faster to being debt free.
Now that you have taken the first and most important step towards financial freedom, let’s underpin this with an emergency fund.
The emergency fund – peaceful nights in turbulent times
After you have successfully freed yourself from the shackles of debt, we underpin your freedom with a small emergency fund. This is a financial cushion that should cover about 6 monthly expenses. This emergency fund protects you from falling back into the debt trap when an unexpected event happens (losing your job, theft, traffic accident, etc.). Likewise, you won’t have to liquidate your long-term investments (possibly at an inconvenient time).
Instead of making your monthly interest and loan principal payments, you now invest those sums directly into a free current account. And by free we mean 100% free with no hidden fees. Once you’ve taken that step, you’re already financially ahead of most of our society.
Now we come to the most exciting part of our journey, because from now on you no longer pay, but earn through the eighth wonder of the world. Learn to invest and start with Step 2.
Compound interest is the eighth wonder of the world.
“Who understands it, deserves it. Who doesn’t understand it, pays for it.” – Albert Einstein.
Current account for emergency funds
Revolut is a European Online-Bank with an international customer-base. They provide a convenient smartphone app and may represent a good option for your emergency account.
Of course you can just go with your local bank if you don’t want to open an additonal account, as any low- or no-fee current account will do the trick. However, opening an account with Revolut is free of charge, so you might as well give it a try.
