Beginners Trick To Liberate You From Money Problems
Before you can start on your way to freedom in your finances, you first have to pinpoint exactly how much debt you really have – and I’m talking about the BAD kind of debt.
For many people, figuring out how deeply in debt they are is like going to the dentist. You know it’s good for you, but it’s not always pleasant.
Whether it’s the good kind of debt (used to create assets), or the bad kind of debt (used to buy doo-dads and liabilities), the more control you have the easier your life is going to be. If you want to accumulate more cash-flowing assets, then you’d better improve your ability to control debt.
When it comes to the good versus bad kind of debt, let me repeat what rich dad often said to me:
“Every time you owe someone money, you become an employee of their money.” That is, if you take out a 30-year loan, you’ve instantly become a 30-year employee for the bank. Unfortunately, they do not give you a gold watch when the debt is retired.
Moving From The Bad To The Good
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.
Fortunately, a friend let us live in an apartment in her garage as we rebuilt our lives. 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 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.
An Exercise To Figure Out How Much Debt You Have
Write down every single debt you owe.
This may include credit cards, school loans, car loans, boat loans, IOU’s to individuals such as friends and family members, store credit accounts, vacation home, and your personal residence.
Do not include debt for investments, such as rental properties and business investments.
And just a reminder, your home is not considered an investment. We are dealing only with liabilities-based debt, and this is debt that you pay for. Asset-based debt is debt that someone else, such as your tenants, pay for.
Then, from the list of debt you made and create a visual drawing of each debt. We used a quadrant with four sides.
In the upper left-hand corner, write in the name of the debt. In the upper right-hand corner, write in the total balance owed. In the lower left-hand corner, write the minimum monthly payment. Now, divide the total balance owed by the minimum monthly payment. In the lower right-hand corner, write in this number and circle it in red. The circled numbers are the number of months it will take to pay off that specific debt.
For example, if you owe $2,000 on your Visa credit card and your minimum monthly payment is $100, then $2,000/$100 = 20. Write “20” in the lower right-hand corner and circle it in red.
Do that for every debt on your list. If you owe money with no set minimum monthly payment, then decide what you want that monthly payment to be.
Then, looking only at the circled numbers of each debt, find the lowest number and place a #1 next to that debt. Find the next lowest number and write a #2 next to it. Continue to do that until there is a number next to each of your debts. Again, go from the lowest to the highest number. The circled numbers are the number of months it will take to pay off that specific debt.
Find An Extra $100-$200 Per Month
This may sound a little daunting at first but brainstorm some ideas on how you could do this:
- Use your expertise and consult for local businesses.
- Find items at garage sales or secondhand stores and resell them on eBay, other online auction sites, or online classified sites like Craigslist. After all, one man’s junk is another man’s treasure.
- Mow lawns, etc.
Face it, if you cannot come up with an additional $100 each month, then what do you think your chances are of becoming financially set in life? Probably pretty slim. If $100 per month is stopping you, then financial freedom will be nearly impossible to achieve.
You can find ways to earn extra money. You just have to get out of your comfort zone and get creative.
The Order For Paying Off Each Piece Of Debt
When Kim and I were facing hundreds of thousands of dollars of bad debt, I went looking for answers. I ran into the same advice everywhere I turned.
The advice was:
- Pay off the debt or credit card with the highest interest rate first
- Pay a little more every month on every debt you have
- Cut your monthly expenses
The question I often hear is, “Shouldn’t I pay off my debt with the highest interest rate first?” Not necessarily for this formula to work. The reason is this: It’s important that you see some immediate results in this process. Otherwise, it is easy to get discouraged and quit before paying off even one of your debts.
For us, we looked at all of the quadrants we made and started paying off the debt with the lowest circled number.
By paying off the debt with the lowest circled number, you are also paying off the debt that will be the quickest to pay off. So you see results quickly. You can see what you are doing is working. This visible progress makes it easier to keep moving ahead with this formula.
Let me guess. You’ve been told if you just pay a little extra on each credit card or loan, then you will reduce your debt quicker. Is that correct? That’s what I was told. However, my credit cards never seemed to get paid off. I didn’t feel I was making progress or getting ahead.
For this formula to work, pay only the minimum monthly payment due on each debt and put the extra $100 to $200 towards Debt #1. Therefore, for Debt #1, you are paying the minimum monthly payment required PLUS $100 to $200 extra. Continue doing this each month until Debt #1 is completely paid off. Go back to your chart of debts and place a big red “X” through Debt #1.
Now, turn to Debt #2. Except for Debt #2, pay only the minimum monthly payment required for all other debts. For Debt #2, pay the minimum monthly payment required PLUS the full amount you were paying on Debt #1 and the extra $100 or $200.
Now you are paying more than simply the minimum monthly payment and the extra from Debt #1. With each debt you pay off, you will be accelerating your payments on the next debt.
Continue each month until Debt #2 is paid off. Continue this process for each debt, always paying the minimum monthly payment plus everything you were paying towards the previously paid-off debt.
If you stick with this formula, you will be amazed at how quickly you can become debt-free.
Editor, Rich Dad Poor Dad Daily