Implement These 6 Steps To Tackle Debt

Dear Reader,

Kim and I had a lot of debt when we started our lives together. We estimate we had a total debt of about $400,000 and growing, as interest accrued. Much of this debt came from a business I lost early on in my career. (The total business loss was almost a million dollars. Approximately $500,000 of the debt was paid off by the business.) On top of that burden, we went through a horrific year in 1985 as we were building our next business. It is hard enough building a business when there is not much money coming in, but it was even harder with $400,000 of debt hanging around our necks. It was not a fun way to start a life together. 

In 1984, we left Hawaii. I sold everything I had and shut down my manufacturing business and we moved to California. We ran out of what little money we had in about three months. We found ourselves broke and, for a short period of time, homeless. It was the toughest time of our lives. To survive, we maxed out every credit card we could get our hands-on, which meant debt was increasing again. 

As those of you who have fallen behind know, it is hard to get ahead with debt hanging over your head. It was tough just buying a car, which we did at an extremely high-interest rate. During this period of our lives, we worked at odd jobs just to cover our debts, to eat, and to keep a roof over our heads. We did this after we worked on our business. So, we know very well what it’s like to be swimming in debt. We know what it’s like to struggle financially as well as endure the stress and anguish it causes. 

On several occasions, we considered declaring bankruptcy, but we did not. We thought it best that we learn our lessons and pay back the money. For us, paying the money back was a wise decision because it made us stronger as a couple, smarter as investors and business people, and more confident about our future. By 1990, we were out of consumer debt and had paid back most of the $400,000 I owed investors. Today we are richer, not just because we have a lot of money—but richer from the experience and the lessons we learned digging our way out of debt.

Understanding Good Debt and Debt That Is Not Good: The Key To Getting Out Of Debt

For many people, debt is a four-letter word. The conventional wisdom is to tell people to stay away from it like the plague. Many financial gurus have built their whole empires on decrying debt and helping to get people out of it.

At Rich Dad, we don’t feel this way about debt. Rather we make an important distinction between two types of debt: good debt and debt you need to get rid of.

Debt that is bad is debt that is used to purchase liabilities such as cars, vacations, clothes, and even emergency funds for things you simply don’t have the cash to cover.

Why Is This Kind Of Debt Bad? 

Because it doesn’t make you richer. It makes you poorer. This is because liabilities take money out of your pocket each month, not put money in them.

Good debt, on the other hand, is debt that puts money in your pocket each month. It makes you richer. It is used to purchase things like investment real estate, grow your business, or take advantage of other investment opportunities. In short, it is used to purchase cash-flowing assets. The cash flow from those assets pays for the cost of the debt.

Unfortunately, most people in America are saddled with debt that’s bad and have no idea how to put good debt to work for them. And the reality is that before you can put good debt to your advantage, you really need to take care of your bad personal debt.

How We Got Out Of Debt

As I said, when my first business failed, I personally had over $1 million in debt that needed to be paid off. Those were hard times for Kim and me. Having as much debt as we did, coupled with the emotions of losing my business, it would have been easy to roll over, get a good job, and give up on my dream of building a successful business. I’d be lying if I didn’t say it wasn’t tempting.

Thankfully, we didn’t give in to that temptation. Instead, we made a plan.

Using all we had learned about money and how it worked, we looked for great opportunities to build our asset column—and eliminate our personal consumer debt—debt you don’t want. By implementing this plan, we were completely debt-free within a few years and on our way to financial freedom.

How to get out of debt with these six simple steps

The following are the six simple steps you can use to eliminate your personal debt. If you implement them, they will work.

Step #1 – Lockdown debt that is bad

If you have credit cards with outstanding balances, discipline yourself to use only one or two credit cards. Any new charges must be paid off in full every month. Do not incur any more long-term debt.

Step #2 – Up the ante

Come up with $150 to $200 extra per month. If you have good financial education and understand how to have money work for you, this should be relatively easy to do. If you can’t generate an additional $150 to $200 per month, then your chances for being free financially may only be a pipe dream.

Step #3 – Focus on one

Apply the additional $150 to $200 to your monthly payment on only one of your credit cards. You will now pay the minimum payment plus the extra money on that one credit card.

Pay only the minimum amount due on all other credit cards. Often people try to pay a little extra each month on all their cards, but those cards surprisingly never get paid off.

Step #4 – Keep it rolling

Once the first card is paid off, apply the total amount you were paying each month on that card to your next credit card. You are now paying the minimum amount due on the second card plus the total monthly payment you were paying on your first credit card.

Continue this process with all your credit cards and other consumer-credit debt. With each debt you pay off, apply the full amount you were paying on that debt to the minimum payment of your next debt. As you pay off each debt, the monthly amount you are paying on the next debt will escalate.

Step #5 – Go big

Once all your credit cards and other consumer debt are paid off, continue the procedure with your car and house payments. If you follow this procedure, you will be amazed at the shortened amount of time it takes for you to be completely debt-free. Most people can be debt-free within five-to-seven years.

Step #6 – Build your wealth

Now that you are completely debt-free, take the monthly amount you were paying on your last debt, and put that money toward investments. Build your asset column, even using good debt.

Tackle Debt Head-On

Facing my ruined financial statement was a painful experience. Yet facing my problems was the best thing I could have done. Rather than wasting time pretending I had no problems, I faced my financial statement and my problems and found out exactly what I did not know,  as well as what I needed to learn in order to fix my financial situation.

Watching me groan and moan as I faced the financial train wreck, rich dad said, “If you are willing to face the truth and learn from your mistakes, you will learn far more about money than I could ever teach you.” He went on to explain, saying, “When you face your own personal financial statement, you face yourself and your own financial challenges. You begin to find out what you know and what you do not know. When you look at your financial statement, you become accountable to yourself. Just as a golfer cannot blame anyone else for their bad scorecard, once you look at your accounting records, you become personally accountable.”

 

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

 

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Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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