Are You DROWNING in Debt and Suffering from BAD Credit?
After I lost my first business and found myself in the financial ruin I’d created, my rich dad said to me, “When your car is broken, you take it to trained professional mechanics and they fix your car. The problem with your financial problems is that only one person can fix those problems, and that person is you.”
Explaining further, he said, “Your financial situation is much like your golf game. You can read books, attend seminars, hire a coach, and take lessons, but ultimately, only you can improve your golf game.”
One of the reasons so few people attain great wealth is because, when people get into financial trouble, they do not know how to get out of trouble. No one has ever taught them the basics of how to diagnose the particular financial problem they may be in. As a result, although people may know they are in financial trouble, they do not know how to read a financial statement or how to keep accurate financial records, so they do not know how serious their financial problems are or how to fix them.
4 Lessons in Debt
Whether it’s good debt or bad debt, 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. Below I share some lessons on debt, mindset, what banks like, and the power of leverage…
Lesson #1: The Importance of Good Debt and Bad Debt
Rich dad stressed the importance of financial literacy and the fact that your financial statement is your report card once you leave school.
Our friends, a couple who live above their means and who drive the cars of their dreams, get poorer instead of richer because the income from their jobs is their only source of income. Their expenses increased (dramatically) but their income didn’t increase at the same time. They look good physically on the outside, but I suspect that financial worries from bad debt are eating them alive on the inside. They are buying liabilities with bad debt instead of buying assets with good debt.
Buying assets with good debt that provide the cash flow for paying for the liabilities you want in life is what rich dad taught me. The cash flow from your assets represents your money working for you, something my old friends, and many people today, still do not understand.
Lesson #2: The Power of Inspiration
I believe our creator assists us, humans, in building beautiful things. When I see a beautiful painting or a beautiful home or a beautiful car, I feel inspired. I feel the generosity, the beauty, and abundance of god, and it inspires me to go out and invest more vigorously—by investing harder, not by working harder. I notice that people who treat themselves poorly are often not the most inspiring people to be around.
We are all different, and we make different choices. I am simply sharing with you how Kim and I use the luxuries of life to inspire us to become wealthier.
Lesson #3: My Banker Loves to Lend Me Money for Both Assets and Liabilities
My assertion in Rich Dad Poor Dad that your house is not an asset created a lot of controversies. In fact, I received more angry mail about that than any other point in my books. I often say, “When your banker says your house is an asset, they are not lying to you. They are just not saying whose asset it really is. Your house is their asset.” I’m not saying don’t buy a house. All I’m saying is don’t call a liability an asset.
Your banker will lend you money regardless of whether you buy an asset or a liability. Your banker does not tell you which one to buy. So if you want to buy a new speedboat and your financial statement shows that you can afford the payments, the banker will be more than happy to lend you the money.
Since your banker does not really care whether you buy assets or liabilities, because either one is an asset to the bank, then maybe you should care. In fact, the more you care, the happier the banker is because the banker’s job is to lend you more money, not turn you down for your loan. Bankers do not make money unless you borrow money. So the richer you become, the happier your banker also becomes. I love my banker because my banker lends me money to buy assets as well as liabilities.
Lesson #4: What Asset Does Your Banker Love the Most?
Rich dad said to me, “Which one of the four asset classes does my banker love the most?” The answer is real estate. When you factor in the tax advantages, the real estate market can improve by less than one percent and have the same net return as a paper asset improving by 10 percent.
Those are some of the reasons why rich dad said, “Always give the banker what he wants.” And why he also issued these words of caution, “Always treat any debt as you would a loaded gun.” That’s because leverage can swing both ways with equal force. You can make a lot more money using the bank’s money, and you can lose a lot more money using the bank’s money. Investing in your education and several years of experience is necessary. If you are not willing to pay that price, do not use other people’s money.
How We Got Out Of Bad Debt
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.
But below are the 10 steps we followed to get out of bad debt:
Step 1. Tell Yourself the Truth
The first and toughest step of all was to commit to telling ourselves the truth—to face the grim reality of how much we owed and to whom we owed it. We knew we could easily lie to ourselves and pretend we were okay financially, which is what many people do. So, face the hard facts and hold ourselves accountable.
Step 2. Stop Accumulating Bad Debt
There’s a saying that goes, “When you find you’ve dug yourself into a hole… stop digging.”
We basically put a freeze on all debt. Anything we purchased was paid off that month. We stopped adding to our existing credit card balances and took on no new loans. That step alone forced us to be much more cognizant of what monies were flowing out.
Step 3. Make a List of All the Debt You Owe
Write down every single debt you owe. This may include credit cards, school loans, car loans, boat loans, 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.
Step 4. Hire a bookkeeper
We hired a bookkeeper. She became a valuable member of our team. People often ask, “Why hire a bookkeeper when you have little-to-no money?” The answer is simple: Because our bookkeeper forces us to face the truth of where we are financially every single month.
Step 5. Make A Visual Picture of Each Debt
From the list you’ve made in Step #3, create a visual drawing of each debt. From there, you can then determine which order each debt will be paid off.
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.
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.
Step 6. Determine the Order for Paying Off each Debt
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.
Step 7. 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.
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.
Step 8. Except for Your #1 Debt, Pay Only the Minimum Monthly Payment for Each of Your Other Debts
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 celebrate!
Step 9. Move On To Debt #2.
You made it through the first milestone. Congratulations! 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.
Step 10. The Monthly Amount You Paid on Your Final Debt—Invest It!
This process does not stop once you’ve paid off all your debts. This is the point where you go from being debt-free to becoming rich!
Take the total amount of money you were paying each month on that last debt you paid off and invest it. Do this every month. It’s very likely that the monthly amount has grown quite a bit since you started this process. Imagine having that much money every month to invest and, more importantly, to contribute towards you becoming financially free—never having to worry about money again and living the life you choose!
Editor, Rich Dad Poor Dad Daily