Test question: what is one of the top killers of acquiring wealth? Yep, you guessed it, being in debt. Or maybe you didn’t guess it. Perhaps you thought that great wealth was acquired by some great investing technique? So, you assumed the destroyer of wealth was losing your edge, or having terrible drawdowns in the market. Not so! The secret to beginning true financial success is taking the steps to get out of debt. For good!
Having losses in your trading account can certainly make a dent in someone’s net worth as a numbers game. But before we get to investing techniques, let’s get back to the basics here. Let’s look to the everyday person. Let’s examine what most of us face on an everyday basis. The everyday person who is struggling to make ends meet, which might be living paycheck-to-paycheck. Someone who is trying to do more for themselves by investing a little bit here and there in order to get ahead in life.
For that person, one of the single biggest killers of their dreams is the fact that they’re consistently in debt. And before we get into the argument about good debt
vs bad debt, let’s realize that for most people out there, they’re struggling with bad debt. It’s the debt that’s easy to come by and hard to get rid of, that takes from your financial success.
We’re not talking about someone who has experience using real estate to leverage their assets. Or someone who is skilled at using margin or options to leverage their trading accounts (although all of these can have negative consequences too). We’re talking about someone who started out with credit card debt from college and twenty years later has never gotten out of the habit of continually using (and owing) on this debt. Someone who is over-leveraged in their mortgage. And someone who needs a new car every four years.
You get the picture. This can be (and is probably likely) many of us out there. I too know the painful cycle this habitual pattern can progress into. I would go through times where I would use different credit cards until they were all eventually maxed out. Where I would be paying on Christmas items that following July. Where I eventually found myself in over $100,000 dollars in debt.
And guess what? It was easy to do. And as you probably also guessed it, it was extremely hard to get rid of. In fact, it is probably easily one of the top reasons for holding back my financial progress in life. However, as I was able to overcome, I believe you too will be successful at eliminating this pesky problem to our net worth.
So, in case you’re not aware, let’s look at some of the dangers of having debt.
Debt Costs You More Money
This should be an obvious one. Every time you swipe that credit card and don’t pay it off every month (and a lot of people don’t pay them off) you will be charged an interest fee. This may not sound like a big deal when you’re looking at a small number, but what happens is that a lot of people eventually max out that credit card. Often they will max out more than one.
Then much of their monthly payment just goes to pay on the significant interest charge (dependent on the interest rate of the card). Over time this really adds up. You can easily take something that should have been paid off within a month and stretch that debt across many months. Sometimes even years.
I’ve seen instances where thousands of dollars have been charged on a card. The basic monthly payment turns into a few hundred dollars to which a lot of it just goes to pay the interest!
For example, on a $10,000 credit card charging 14% interest, a payment of $200 will take you 76 months to pay off! You will be paying $5,096 in interest payments! You’ll be paying a total of $15,096. 33% of this is going to interest. This is money in someone else’s pocket! And at that pace, it will take you over 6 years to pay off! Six years!
Yep, I’ve been there myself. I hated looking at my balance and having a massive $150 interest charge on my personal account for something that should have been $0. At the time I could have used that $150 in so many other ways than just paying for the privilege of borrowing someone else’s money (via the credit card).
This is not just a simple math game here either. Debt involves much more than just the numbers. It is a psychological trap as well as you’ll see below.
Your Mindset Will Trap You
What do I mean about this? If you think wrongly about debt (and we’re generally talking short-term, high-interest debt) it will be an expense that drags you and your future down. So, what’s a “wrong way” to think of it?
Thinking that it’s normal and acceptable. If you look around you, that is the common belief. Everyone has debt so why shouldn’t you? Credit cards are pretty easy to get. As long as you have decent credit, they’re willing to send you the plastic. Car loans are also relatively easy to get. That can be the “curse” of good credit: it makes the ability to acquire more debt all the much easier. In fact, it can seem abnormal to not have any debt. Can you name one person in your personal life who actually has no debt? I mean zero debt. I can’t.
It’s outside the norm if you have no debt. So we accept it as normal. We expect to have debt. Paying in cash is much more difficult than it used to be. Everything
seems to be more electronic and the ability to get ourselves into debt is easiest when it’s electronic. It’s just the swipe of a card. Or an online application. You get what you want in minutes.
So, if we look at debt as normal, as acceptable, as expected we can become entrapped. Unless you’re extremely diligent about paying it off, it can get bigger and bigger. And all the money you could have used for you now, presently, is being spent on your past purchases. Your present and especially your future is being hampered because of these expenses. Instead you need to develop a wealthy mindset.
Debt Is Emotional
Having debt affects us emotionally as well. I know I have more stress, more concerns with my financial well-being when I’m in debt. To me, life is more enjoyable when I’m debt-free. I’m sure you feel the same. So, if this is true, why do we allow ourselves to get into debt?
Instant gratification. We want what we want when we want it. Wow, that was quite a sentence! It “feels” good to get the things we want. Now. Not later. Saving for something is just so… painful.
But just as it makes you feel so good, it has an ugly side to it as well. It can make you feel horrible. I hated paying for things in July that I bought for someone at Christmas. To top it off, they probably didn’t even use that gift anymore.
If you don’t have enough money, you can feel stressed out. Plain and simple. Debt will eventually put you there. You then feel frustrated and hopeless.
Debt Will Destroy Your Future
Well, now we get to the juicy stuff! We all want to know what type of future we’ll have, right? This goes back to the math problem. But we’ll keep the math simple: the more money you have to grow today, the more you’ll have in the future. The less you have now, the less you’ll have in the future.
See, simple, right? One of the biggest starting wealth builders you have is your income today. Spend it all today, live paycheck-to-paycheck, and acquire large amounts of debt and you’ll suffer for years to come. Then your retirement will be significantly impacted. Instead, if you live within a budget and keep your debt to zero, you will have more to save and invest. Over time this can really add up too.
Let’s take a look.
If you don’t have money to save and invest, the likely outcome will be that you have zero money built up for your future self. Most likely you’ll just be in more debt. Your net worth could be negative and probably is.
On the other hand, remember that $150 I was spending on my credit card interest payments? Let’s use that figure in the example below in using that money differently than giving it to a credit card company for the “privilege” of using their card (and not taking care of the balance like I should have).
That $150 saved per month in a high-yield savings account (let’s say 2% although it’s hard to get these returns nowadays) over the course of a decade could easily build up and surpass $20,000. Yep, that’s a lot of money! This could be a great emergency savings account.
Take that same $150 per month averaging a 7% return in a high quality Index ETF (Exchange Traded Fund – trades like a stock with low fees – let’s pick one representing the U.S. largest companies, the ETF SPY) over the same decade and your return could be over $26,000!
Now there are going to be those who argue about the “safety” of the stock market. Let’s instead look at the safety of those credit cards. They will take and demand until you’ve paid the last penny owed to them. Credit cards will ruin your overall credit if you’re late or miss payments. They will demand at the cost of your future. Yeah, let’s talk about safety here!
So, What Can You Do About It?
Again, this boils down to a simple math equation: you have to throw more money at it. I’m sure you’ve heard the old adage: if you make the minimum payment, it will take you much longer to pay off your debt. Believe me, this debt repayment can take years if you get yourself too far behind!
- Start by identifying the problem: you’re in debt and you need to get out ASAP! You immediately have to figure out how much debt you actually have. Then decide on the best way to get yourself out of this problem. The first thing, of course, is to stop incurring more debt. Stop spending on things you don’t need! Then set a strict budget. You can make this as strict as you want it to be. The tighter you are, the more you’ll free up to pay down this debt.
- You have to have a continued changed mindset about debt. Debt is a wealth-killer! Don’t let it rob you of your future! Although you’ve allowed yourself to live a certain way, be determined to change for your future self.
- Start tackling that debt one month at a time. Be determined to make more than the minimum payment. Go to a financial calculator and see how much
debt you’ll actually pay by making minimum payments! It’s horrible! - Then make it automatic. It’s one of my favorite things to do. Left to ourselves, we tend to get ambitious at the start then we lose our edge when temptation later settles in. And believe me, it will. So, stop the temptation and set automatic payments up through your bank. Each and every month, that debt will start getting smaller and smaller (if you don’t add to it!).
- Track your progress! Believe me, it’s inspiring and it encourages you to see your balance get smaller and smaller. This will keep you motivated.
debt you’ll actually pay by making minimum payments! It’s horrible!These can be hard steps to take. Believe me, I know. No one else is going to bail you out. If you want a future for yourself and your family, this is an important thing you have to do.
Tip: Earn a little more. If you really want to get out of debt, it’s easiest if you can throw a bit more money at it by earning more. I know, it’s hard to find “extra” money lying around to tackle your debt. That’s why I enjoy taking extra income and using it for this process. This can come in many forms
- Work an overtime shift at work. Yeah, not fun. But neither is debt.
- Work an extra job or a side-hustle.
- Sell something! There are a lot of apps out there where you can sell your unwanted items. Heck, go old-school and have a yard sale. This is a great way to come up with a few extra hundred bucks for a weekend of work!
Summary
The secret to starting financial success is getting yourself out of debt. And we’re specifically talking “bad” debt here. You know, the credit card, the car loans, and other simple high interest credit that’s frequently available to us. It’s not the great techniques at stock investing. It’s taking the normal, boring route and taking care of these charges. Then you’ll have money to build an emergency fund and invest for your future.
Although this can be painful at first, the rewards are pretty phenomenal. It feels good to be free of debt. There is no rule that says you have to live under its thumb. And whether you believe it or not today, I personally believe your future self will greatly appreciate the efforts you make today.
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