Since my official website launch, I’ve been contemplating on my main goals for my journey to wealth. One key and important topic I believe in order to reach success is debt elimination or how to get out of debt quickly.
Let’s define “debt”
According to Meriam-Webster dictionary, debt is something owed or a state wherein one is under obligation to pay or repay someone or something in return for something received.
That is the general definition of debt. However, I myself have read a lot of books about how to become debt free. One of the books that has greatly influenced me is Robert Kiyosaki’s Rich Dad Poor Dad book. If you have not read this book I highly recommend you reading it.
So let me introduce you to the two types of debt.
Types of debt
Essentially, there’s two types of debt. There’s a good debt and there is a bad debt. I’ll discuss the two in more detail shortly.
In the meantime, it goes without saying that most people turn out incurring bad debts than good debts. There’re many factors that contribute to this but below are some major reasons we end up getting ourselves into a pit hole of bad debts:
- the mentality of wanting or having something quickly
- the lure or lust for the latest and the greatest be it gadgets, smartphones, fashion, furniture, appliances, etc.
- impulsiveness or out-of-control spending
- man’s covetous nature of keeping up with the Joneses
- growing up in our modern culture of entitlement and attaining every “wants” quickly
- bombardment of consumerism advertisements left and right
- lots of scams where people trying to take advantage of other people (a sad reality)
I think you’re getting the point, if you can think of some more contributing factors, feel free to leave them at the comment section below and I’d appreciate your inputs very much.
Keep reading below and I’ll be outlining a debt elimination plan that will help you become bad debt free.
Now let’s go on and define good debt. I’ll start with this type of debt more so because as the word implies this not something that negatively impact our lives.
Having good debt is good. I can’t overstate that enough. As Robert Kiyosaki puts it, if it is a debt that puts money in your pocket, than that is a good debt. That’s the plain and simple definition of a good debt.
Sample of good debts I can think of right of the bat are:
- taking a loan to start a “well-thought-out” business venture (notice on the emphasis)
- mortgage on a rental property
- loan for investment use, wherein essentially the ROI is greater than the loan interest
There you have it some examples of a good debt. As I stated above these are debts that put money back in your pocket that will enable you to pay off the debt and then some that you can keep in your pocket.
Also known as “Leveraging”
Another word for this is called leveraging. This basically means using other people’s money. This is taking advantage of other people’s or institution’s resources, such as a bank for example, in order to venture into a business or an investment with the objective of earning back more than what you originally owed.
This is also one of the ways that can help you accelerate getting rid of your bad debts quickly.
Ultimately the objective is to build up your assets through leveraging and thereby grow your wealth, eliminate your bad debts and reach financial freedom and success.
Do you have any other examples of a good debt, leave them in the comments section below, I’d like to hear your thoughts.
So let’s move on to the second type of debt.
Now this type of debt is obviously something that negatively impacts your life and your financial baseline.
Plainly speaking bad debt is a debt that takes money out of your pocket, again as Kiyosaki would put it.
I’ve mentioned above some contributing factors on how we as consumers end up in a pit hole of bad debts, and sometimes to the point of insurmountable proportions.
Now let’s list some examples of bad debts (some of this will need some more explanation):
- credit card debts that cannot be paid up in full by the due date
- buy now pay later or installment types of purchases for the latest and the greatest gadgets, furniture, etc.
- leasing or financing for a “brand new” vehicle (I will expound on this a bit further below)
- leasing or financing for a “second” vehicle (I know this one too needs expounding)
- mortgage of your home (yes you’ve read that right and I’ll also expound on this further down below)
- student loans
- home equity loans for the use of purchasing the latest and the greatest again
These are some that I can think of for now, again as I usually say, if you have more ideas of samples of bad debts comment, comment and comment them below.
Explanation of some examples
Now on to explaining some of the bad debt examples I stated above.
lease or finance of a “brand new” and/or “second” vehicle
I know, I combined the two points above as basically they’re quite similar. The thought process here is, obviously if you’re in over your head or I would even dare say for as long as you still have bad debt especially credit card ones, buying a brand new or getting a second vehicle should not even cross your mind as you’re only digging a deeper hole for yourself.
Bear in mind though that I’m not saying that you shouldn’t purchase a vehicle. I recommend that if you really need a vehicle then just get a second-hand that is within your means to pay off and maintain as well.
If you are single, then be frugal and disciplined enough to make use of your city’s transit system while you’re in the process of eliminating your debt.
Now once you’re at a point of having more assets, especially once you’ve reached that state where you can make your assets pay for this purchase, then that would be a lot better and you can go ahead and purchase the vehicle of your desire.
mortgage of your home
I know most people would react to this and say that home mortgage is an asset. I dare say not. This is probably more so because of Kiyosaki’s influence on me, where he defined assets as entities that puts money in your pocket.
Obviously a home mortgage takes money out of your pocket regardless however convincing your bank says that they are assets.
Again as I stated on my point about the vehicle purchase above, it’ll be better once you reach the state of your assets – entities putting money in your pocket – being able to pay for your home mortgage.
Now I am not a hypocrite to say that I have not done this myself. My wife and I have bought into a home mortgage and are paying it off with our “active” employment income. It is my aim though to build up our assets so that eventually our mortgage will get paid off by our “passive” income or investments. (That’s one of the purpose of this website, it’s a journey and a process).
There you have it folks, my sort of Debt 101 course for ya.
Let’s get into the “bad” debt elimination process.
How to eliminate “bad” debt quickly
Write down all your bad debts or put them in a spreadsheet
Treat your bad debt as your enemy. Writing them down is a way of putting a target on your bad debt so that you will remain focused into eliminated them and not get side tracked.
Also, this will help you as you go through the process as you see your debts decrease and gets eliminated one by one, it will encourage you to keep striving forward.
Write down the interest and minimum payment or amount you intend to pay for each debt
This exercise will give you insights as to which debt you’ll have to tackle first. Like I said focus is the key and having a clear view of your debts would help you as you tackle them all.
Re-order your bad debt list
Now there are three different and common ways I’ll introduce to you in ordering your list.
1) You may choose to order them from least to greatest based on the amount of debt.
This style of list will be used to tackle the smallest ones first so that you’ll see your debts getting eliminated quickly one by one and then you proceed on to the next one.
The only drawback on this is if you have a higher interest on a debt that is bigger then you’ll end up paying more interest than necessary.
2) Or another way is one that has the higher interest rate down to the one with the lowest interest rate.
This style of list would tackle your higher interest debts in order to avoid paying more interests than you would. I personally like this style of order.
3) The third way is determining the one with the least amount of time to pay off to the longest time it will take you to pay it off.
Now this method of ordering your debt can be done by dividing your debt with the minimum payment required every month or even the amount you intend to pay for each debt every month.
There’s a caveat of course that you should at least aim to pay the minimum required.
The resulting factor with the lowest number would be the one that you’ll prioritize and then on to the next factor higher and down the list goes.
In my opinion, I would use a combination of these methods. You can even combine all three. There’s no right or wrong way of doing it. The point is to have a definite plan on how to tackle your debt.
Accelerate your payment
Now here’s what will help you pay off your debt quickly. You’ll have to dig deeper into your pockets. By this I mean you’ll have to set aside a definite amount that’s above all your minimum payments combined that you’ll add to the debt that you’re prioritizing from your list.
For example, set aside $100 extra and add to the debt that’s on the top of your list.
In this step, you’ll have to tighten your belt a bit and figure out where you can find some extra money from your budget to add to your debt elimination plan.
It goes without saying that the more you can put into this the better. Also, the key is consistency. Once you’ve defined your payment accelerator amount (as I would call it), you’ll have stick to that amount from beginning to end.
Eliminate the next debt faster
As one debt gets eliminated, add the payment for that onto the next one. This is where you’ll truly see your debts getting tackled quicker and faster.
There you have it folks. Again I can’t overstate it enough that you’ll need discipline and consistency in tackling your bad debts aggressively.
The road to financial freedom is one without bad debt so it is very important that this be addressed in every person’s financial journey.
I hope this has been informative for you and I thank you for reading.
Finally, I’ll leave you with this thought, comment your thoughts below and let’s start the discussion rolling. I’d love to hear from you all. Cheers!