Debt Tips

Good or Bad Debt-Should I Worry?

As you finalize getting your Financial Matters in order, I want to give you a few Debt Tips to help you understand whether you need to be worried about any debt you may have right now.

Many people put off ever investing a dime until "they get all their debt paid off." I'm here to tell you, if you wait for that day, you may watch the financial riches real estate has to offer pass you by.

The average American has $7,000 of credit card debt. Most of us have mortgage payments and car payments, some of us student loans. In other words, it is a rare person who is truly "Debt Free!" (If you happen to be one of those lucky people, then by all means, skip to another page.)

We've all heard the terms Good Debt or Bad Debt. My First Debt Tip is to understand the difference. Good debt is what you incur by making a purchase that is for an appreciating asset, such as your home, or for an asset that brings you a monthly positive cash flow or passive, residual income. In other words, the debt is paid for by the investment itself. Now you may be saying that your home doesn't pay for itself, and that's true, but we all need a roof over our heads, and it's far better for tax purposes to own than rent, so that's your one exception to the rule.

Bad debt, on the other hand, is debt that takes money out of your pocket. It's used to purchase depreciating items (i.e cars), or items with no expectation of increasing in value but merely to satisfy an immediate gratification (i.e. clothes, travel, consumer goods, etc.). Making these purchases is a normal part of life. Where people get into trouble is when they delay the payment of these purchases by using credit cards or high interest rate loans to pay them back. The debt builds up, your income doesn't increase to pay it off, and you feel trapped and wonder how you will ever get out of it. It's a vicious cycle.

My Second Debt Tip is to understand that there is a way out. The first and most obvious thing you need to do is perform your profit & loss so you can determine where you are spending too much money, stop that habit, and start building reserves as we discussed in the Savings Plan section.

The debt that you do have you should be making at least the minimum payment on. Then, take the credit card or loan that you have with the lowest balance on it and try to make an extra $50 or $100 a month payment in addition to the minimum payment you are already making. I know, you're in debt, where are you going to get an extra $50 or $100 a month? For most of us, it's just a simple matter of giving up a few non-life essentials to make this happen. You just have to want it bad enough.

Why start with the lowest debt amount that you have? Many financial gurus will tell you to pay off the debt with the highest interest rate. But I have found that the sooner you prove to yourself that you can pay off a debt, and the satisfaction that you get from doing it, will propel you to keep doing it. In other words, you need the motivation to continue to pay each and every card or loan you have off. Starting with the lowest balance psychologically works to keep you on track!

Then, once you get that card paid off, take the money you were targeting for that debt and redirect it to another card or loan. So now you are making the minimum payment on this second card or loan PLUS the amount from the card or loan you just paid off. Pay that debt off. And now take all that money and direct it to the next card or loan. Can you see how by doing this, you will slowly but surely start to pay off your debt, all without having to significantly impact your lifestyle (only slightly modify it).

And my Third and Final Debt Tip - you guessed it. When you have completely paid off all that debt, take that money and redirect it to your Wealth Fund!

By implementing these simple but effective Debt Tips, you can stay on track with your investment goals, be simultaneously investing while at the same time ridding yourself of a huge burden, and be well on your way to the Financial Freedom you dream about!