Managing Debt

What is Debt?

Debt is an obligation to pay back another party an agreed upon sum of money at an agreed upon interest rate. Having debt keeps people from getting ahead financially, and eliminating debt frees up money to build wealth.

  • When we use debt we pay interest, so we’re paying more for a good or service than it actually costs. Doing so is a surefire way to struggle with money your entire life.

  • Eliminating interest payments and learning how to be the one receiving interest, is a surefire way to be wealthy!

  • Beyond crippling people financially, debt takes a toll on physical and mental health for millions of people.

Woman drowning in debt

Good Debt vs. Bad Debt

Despite what you may read, almost all debt is bad. The one exception is debt used to purchase an income generating asset such as a rental property, but even that requires a lot of financial education to prevent it from turning into bad debt. Some “experts” will say that loans taken out for college are good debt. They aren’t. If you think they are, talk to the person who has $150,000 in student loans and earns $40,000 per year.

Debt is almost always bad. As others have said before me, debt is a four letter word.

Debt Paydown

There are two popular methods to pay down debt described below. Both can work, but it is your focus and determination that will determine if and when you get out of debt. You need to payoff as much as you can each month to lower the balance and ultimately eliminate the debt. I can help you choose the option that works best for your particular situation, and craft a spending plan that makes it happen.

Debt Paydown Methods

  • Debt Snowball - Pay down the smallest debt first and work your way up, regardless of the interest rate

  • Debt Avalanche - Pay extra money toward the debt with the highest interest rate, regardless of debt balance.

The debt avalanche aims to save the most on interest by tackling the highest interest rate debt first. This is the correct choice mathematically. However, some people feel the debt snowball helps you maintain momentum as you see those small debts disappear quickly. I personally like the debt snowball.

Staying out of Debt

Get out and Stay Out

All the debt paydown methods in the world won’t help if you continue borrowing money. Use these guidelines for getting and staying our of debt for good;

  1. Understand that most debt is bad and avoid it

  2. Cut expenses, find extra income, and aggressively pay down your debts using one of the paydown methods

  3. Only pay for what you can afford now and avoid loans at all costs

  4. If you absolutely need a loan, limit the amount and time period to reduce interest payments. And be sure to shop around for the best rate

Visualize your Life without Debt!

What would your life be like with no credit card payment, no car payment and no student loans? What about no mortgage payment?

Your cashflow would increase more than any raise you could receive at work. More importantly, you would free up money to build substantial wealth by saving and investing for things like retirement, college or a new house. Getting out of debt is hard and takes a lot of grit, but the rewards include a happier, healthier and more financially secure life.