Mathematically it doesn’t make a bit of sense. But of course if I could do math I wouldn’t have been living paycheck to paycheck and having too much month at the end of my money. I run into self proclaimed financial scholars on a very regular basis and each one of them subscribes to the idea of using debt as a leveraging tool in order to build wealth. Is this possible to do? Yes it absolutely is! The premise of this blog explains the reason why so few people are actually able to do this though. We are sinful creatures. Our natural tendencies lean more toward the side of stupid than the side of wisdom. The people that can use debt as a leveraging tool have high levels of self control, fiscal discipline, and frankly a sense of danger that I’m not willing to risk. Danger you say? Absolutely! I’ve been on the receiving end of harassing creditors wanting their money. I’ve been the father with a 3 month old baby and can’t afford diapers and formula. I’ve been the husband with a marriage on the ropes because the electricity is getting shut off tomorrow because the bill hasn’t been paid. If you don’t play with fire you won’t get burned and if you don’t jump in a snake pit you won’t get bit. (yes I know that’s not grammatically correct but it makes a better point) Proverbs 22:7 says, “The rich rule over the poor and the borrower is slave to the lender.” I don’t want to be poor anymore and Jesus Christ has set me FREE so I sure don’t want to voluntarily walk into slavery again.
Your income can become your strongest and fastest tool that will build wealth for you, not your 3% interest mortgage or your 0% interest credit card. Good ol’ fashioned hard work is what will make you rich! But if all of your income is tied up into mortgage payments, car loans, student loans, credit cards, personal lines of credit, or Lord help you payday loans then you have no money left over for building wealth. Step one is outlined in The Foundation which I posted a few weeks back about the nuts and bolts of budgeting.
Step 2 is to use every bit of lazer focus and intensity that you can muster up to knock out every bit of debt you have as fast as possible. It will mean sacrifice. It will mean store brand vs. name brand. It will mean cooking more at home. It will mean more time spent with your family at home and less time spending money at the mall. It means that a short term sacrifice can equal a long term WIN for you and your family.
HOW TO GET STARTED PAYING OFF DEBT:
1. Using your awesome budgeting skills find any extra cash you can and put it towards your debts. This is the part where the sacrifice comes in. You no longer get Velveeta Mac N Cheese, it’s down to boxed Kraft.
2. Get current on all your monthly payments if you are behind. (Exception to this rule: get current on all of your active accounts if you are behind. If you have bad debt or charged off debt or debt that is in collections leave those alone for right now.)
3. Once you’re current on all of your active debts make a list of ALL debts, current and charged off, except for your primary mortgage. This includes medical debts, old cell phone and apartment bills, pretty much anyone you owe money to currently or owed them money 10 years ago and they’ve probably forgotten about it but you still owe it. Arrange this list in order from the smallest debt to the largest debt. That $5 you borrowed for lunch from your co-worker who no longer is in your department because it was 2 years ago all the way up to your $50,000 Escalade car payment and on up to your $80,000 in student loans. Total up that list and at the bottom you have your debt mountain you have to climb.
4. Now its really time to use that lazer focus. Every dime of extra money you can squeeze out of your budget start applying it to this debt list starting with the smallest debt. Sell stuff, deliver pizzas or newspapers, take a part time job, liquidate your non-tax sheltered savings accounts (more on this later), make the sacrifices necessary to get the ball rolling. Apply as much cash as you can find out of your budget for the month and apply it to your debts as far down the list as you can get. There’s just something rewarding about paying that co-worker the $5 back after 2 years. So get a bunch of those little wins early.
5. As your debts start to go away, you’ll notice your minimum payments go away too. Take those minimum payments and apply them to future debts. Before you know it you’ll be paying $800/month on a debt that only has a minimum payment of $15 and the debt is gone in weeks, not years.
This step is probably the hardest part to becoming wealthy. But FREEDOM always comes with a price. Jesus set you free, don’t be in the bonds of slavery anymore!
What will you do with your freedom once you’re debt free? Leave your thoughts in the comments.