Debt, a four letter word or a leveraging tool to the next level? Well, both and it depends. The wrong kind of debt and the wrong amount can be toxic to our ability to conquer financial freedom. But, most of us also need some in order to advance our skills, buy property, buy a car, etc. It is fun to talk about new ways to make money and invest in things, but we sometimes ignore the debt side of the equation. We may not want to face it because it can feel so overwhelming. It has also reached a level of national and personal emergency. The nation faces a debt crisis and there is talk among economists that it will trigger the next recession. Many individuals also face a difficult situation with large amounts of school loans, car loans, consumer debt, etc. In other words, they face a “Debt Dragon!” Americans owe a combined $1.48 billion in student loan debt. American credit card debt continues to climb, reaching $905 billion. Auto loans total about $1.2 trillion. The average household carriers approx. $15k in credit card debt, $27k in auto loans and $46k in school loans. Wow, ticking time bomb! This would hamper the ability to build wealth and could sink a family if a personal emergency struck. But, there is hope!
The Debt Dragon is sitting on your pile of gold, take out your sword and attack!
So how do we manage it? What can be considered good vs bad debt? What are some strategies for paying it down?
If you plan on building a high net worth and becoming financially free, you will need to crush debt! I made the main blog illustration as an example of how you should ultimately treat debt. Kick it down and destroy it, just like this viking gladiator dude! That said, we should use certain kinds of debt, but too much of the wrong kind of debt is toxic to our ability to grow wealth. We have all (or most of us) have been in too much debt before. So, no matter where you are starting from and how desperate it may feel, you can do this. There are amazing inspirational stories all around of people that made it a laser focus to destroy debt and succeeded with focus and time. If you think of debt as a kind of slavery, you may view it differently. I ran across a book with that title not too long ago, “Debt is Slavery”. If you use it correctly, debt is leverage that can actually propel your net worth, but used the wrong way it becomes the enemy of wealth and seriously hampers your ability to accumulate wealth and take advantage of compound interest over time! In fact, the wrong kind of debt moves you backwards.
I have used financing for all my major purchases over the years: houses, cars, school, etc. I never had tens or hundreds of thousands of dollars laying around to use for these purchases. If most of us waited around to save that much to buy a house or education we would probably never buy a property or go to school, this doesn’t make sense. Some debt can be a good “investment” using the leverage of other people’s money. Using debt to finance a rental property or an education is a lot different than buying a car, clothes, vacation, electronics and other material junk one probably does not need. With the rental properties and degree I feel there was a strong return on the investment. But, it’s still important to get the lowest interest rate possible and be comfortable with your ability to pay it down in the future. Be very cautious about going too crazy.
So if your in “toxic” debt, do not worry or get sad, get mad and attack it! You are not alone. Most experts advise paying off the high interest credit cards first. Then, never use them if you can’t control yourself.
Here are some strategies I have used to manage debt:
1. Use debt wisely, as leverage to buy assets or things with a return on investment (property, school, businesses)
2. Use the right amount for your situation (have a sense that you can pay it down over time) Does the amount make sense in terms of your salary and income?
3. Avoid and destroy toxic debt. This is for stuff you really do not need (cars, clothes, furniture, vacations, stuff in general…) None of these things have any kind of return on your investment. They are nice, but they are luxuries. Save for these things and pay up front.
4. Pay extra. I have always tried to pay extra on my debt. Even $50 or $100 more a month can save big on interest.
5. Destroy high interest. Many experts recommend tackling the high interest debt first. That high interest will eat away at your ability to build wealth.
6. Problems compound, have an emergency fund. I have found myself in hot water when problems compound. What I mean is first I may not have an emergency fund. Then a major house or car repair comes up, then another another. Then I get a little too crazy with eating out or buying consumer stuff I don’t need. Before you know it, big time toxic debt.
7. Find ways to live simply. If a person is in school, they may want to find roommates or find other ways to trim monthly expenses. While a person is living off student loans, they won’t want to add to the amounts. Perhaps one can do without a car for those school years. Eat inexpensive meals. Have a part time job, etc. This way a person does not graduate 4 years later with hundreds of thousands of dollars in loans.
We know you can do it! I have been following a great personal finance blog called getrichslowly.org for many years now. The author has a great article about the debt snowball and the wealth snowball effects. Simple math and eye opening. One can use many strategies to slay the debt dragon and keep it in check.