PSYCHOLOGY OF PROFIT FIRST
ERADICATING BUSINESS DEBTS
APPLYING PROFITS FIRST TO YOUR OUTSTANDING DEBT
We live in a constantly changing world and no single person is aware of what is going to happen next. As the current pandemic COVID-19 has caused economic break down in many countries, the chain will continue to affect businesses and its debts. The profitability of every business is going to hit tremendously. In such times, the debts of any company are a crucial issue; be it either business loan, credit cards, accounts or any other payables.
It is normal that when people start implementing profits first that they have debt, and usually debt from a number of different sources.
THE DEBT FREEZE
The first step that needs to be taken is that you implement a debt freeze, you need to stop getting further into debt. The only way that you can go onto a debt freeze is if you reduce your expenses immediately. We need to analyse all the expenditures thoroughly and consider which expenses we incur unnecessarily. Can we avoid spending money on such items? There are certainly some expenses which we do not pay attention to and are incurred unnecessarily. For example, subscription fees for software or magazines will fall into unnecessarily incurred cost if no one reads it regularly.
A good way to start is to cancel all your debit and credit cards. All your bills will hit the wall and your suppliers will reach out to you and you can evaluate if each expense is providing value to you.
If you are not able to decide to straight away remove such expenses, then give a fixed time period – two months or three months; to yourself to stay committed to the usage of such application. If you observed that you could not utilise its benefits it is certainly waste of your money and you may now decide to remove this expense.
THE DEBT SNOWBALL METHOD
The logical approach to debt is to pay off the highest interest rate debt first but behaviourally this doesn’t make sense. The reason that we pay off the smallest debt first is to create momentum. If you try and pay off the largest debt first because has the highest interest rate you don’t see any short term results or quick wins. Without any quick wins you lose momentum and motivation to keep paying extra to reduce the debts and meanwhile all the other smaller debts will still be hanging around.
By paying off the smallest debt first you create momentum, and you see progress and best of all soon that first debt will be out of your mind forever.
Now you need to pay the minimum repayments on all the debts as per normal. Then when it comes time for the profit distribution we do something different. This is the only time that you can use your profit distribution for anything other than profit. Use 95 to 98% of the distribution to eradicate the lowest value debt. It is really important that you use a small portion of it to celebrate.
For example if we get a $1,000 profit distribution we use that to completely eradicate the first $500 debt and the balance to reduce the $750 down. We then use the original $50 minimum repayment on the $500 loan and increase the minimum repayment on the $750 loan to $150. We repeat every quarter.
The next quarter we receive a $700 profit distribution. We use the first $250 to eradicate the original $750 debt and then the balance to pay down the $1,000 debt to $550. The 150 monthly repayment is then added to make the new monthly repayment $330.
This enables us to get quick wins, which helps build momentum and get behavioural wins. By the time we get to paying the down the larger debts we are paying $100’s of dollars over the minimum repayments and you have really built momentum into paying off your debts. You can get those debts paid off and then back to focussing on taking your Profits First.