Saturday, July 31, 2010

Tier 3: Debt Reduction

This seems obvious but a lot of people tell me they will start investing when they get out of debt. All debt should be eliminated as soon as possible, especially short term obligations (everything but mortgage & student loans). However, it is important that you put your family first; both their present situation and future. It's a principle I call Pay Yourself First. After paying yourself, and God tithing, you can use what's left to pay down debt. I want to emphasize AS FAST AS POSSIBLE. If this mean you'll be eating rice and beans for a couple of years so be it. Maybe you can't handle just rice and beans, but Roman Noodles are cheap and so is pasta. Many soups can be made very cheaply as well. The point is that you won't be eating out, you won't be buy pre-made dinners or name brand anything. If you can put off buying something, put it off. It won't be easy and I never said it would be, but it will be worth it. It's time to separate the men from the boys, the rich from the poor, etc.

As far as debt settlement, consolidation, etc. Be very weary of any program you find because there are a lot of companies that prey on the weak and desperate. They'll show you what looks like a way out, and it may be, but not necessarily the easiest or fastest. Any kind of settlement, consolidation or bankruptcy will not change behavior. It will only mask the symptoms. If you cannot change the behavior that got you into debt then any program like this is worthless. If you don't think your behavior got you into debt, think again. At minimum you were not saving enough into an emergency fund to avoid debt. Just think about where you went wrong and try to learn from your mistakes.

0% interest. I know it's tempting. Especially when you need a car for work. I am even tempted when the dealer offers me an amazing deal on the jeep of my dreams. Avoiding is done for many more reasons than just avoiding interest costs. Debt is literal imprisonment. It creates an obligation that must be met and is trades for freedom. Instead of working because it right or you enjoying it, you end up working because you have to. I know people that were severely underpaid, but were too afraid of not being able to meet their obligations in order to search for other employment. Debt also creates risk. If something goes wrong the debt snowball can roll the wrong way and before you know it you're in a whole world of hurt. That 0% can easily turn into 12% when you miss or are late on one payment. Suddenly your payment has doubled so has your obligations.

Even mortgages and school loans need to be eliminated as soon as possible. Yes you can probably get a rate of return somewhere else that's high enough to offset your interest costs, but life is not a mathematical equation. Even those long term obligations enslave you in a way you don't know until you're free. Being debt free empowers you to make bold decisions that lead to success.


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