Debt Elimination Strategies
The famous line from the movie Fight Club sums up our current economy effectively; "We buy things we don't need, with money we don’t have, to impress people we don't like."
It’s easy to want the best of everything. We have been programmed from childhood. We want to go to nice restaurants, live in a great apartment, buy new clothes, drive new cars, own the most recent tech gadgets to record our experiences on our luxury vacations. Ironically, it is the least prepared to manage this debt that are its most common victims.
There is nothing wrong with spending and certainly nothing wrong with spoiling yourself and those you care most about, but it cannot come at the expense of your security. Add 21% to all those new ‘must haves’ and compound the problem by making minimum payments that take years to complete and you may start to get a small sense of this massive problem. Interest payments on your home, your credit cards, car payments, grocery cards, gas cards and any other possible card that allows you to defer today’s bills till tomorrow. It is financial suicide.
The objective is not to cramp your lifestyle, but to understand the incredible benefits of living within your means and to find the joy living within your means brings. Living within your means doesn’t have to be a prison sentence. If you really try and use your imagination you will find that quality of life is far from being determined by your shopping experiences.
The long-term freedom you will experience is well worth the short term sacrifices you make. Our definition of sacrifice is giving up something good today for something better tomorrow. If you are unable to control your emotions and need to have it all now, you will harm your future in ways you cannot even imagine.
Credit Card Debt
According to MSN.com, 40% of millennials spend money they don’t have to keep up with friends. Keeping up with the Joneses will forever be a losing battle, because you are not spending money for your happiness; you’re doing it for the approval of someone else. It is the most expensive meal you will ever feed your ego!
Let’s say you carry a credit card balance of $5000 at an interest rate of 18.9% and decide to only make the minimum payment allowed: $200. It will take you 132 months to pay that card off! That’s right, more than 11 years, and you will pay over $8000 by the time you are done. If you are in Mexico reading this, Credit Card interest rates are as high as 65% per year!!!
If you do find yourself in Credit Card debt and you are looking for the best way to get out of debt, the first thing you will want to do is take your credit cards out of your wallet where you have easy access to them, start with the credit card that has the lowest balance and pay that off first as quickly as you can and continue to make your minimum payments on any other Credit Card debts you may be carrying. Then move to the next and then the next if that is the case.
Some suggest you pay down the cards with the highest interest first, and there is very good logic for doing so, but sometimes we need to think beyond logic. The main reason for paying off your lowest balance first is the feeling of success and sense of progress that will keep you motivated to keep going until all your cards have a zero balance. The choice is yours of course.
It’s also important to note that you don’t want to cancel your credit cards as that may affect your credit rating, so it is best to make a few small purchases each month, like gas, on your credit card and PAY IT OFF IN FULL a few days before the due date.
Debt negotiation or debt settlement companies aim to help people with $10,000 or more of unsecured debt (e.g. credit card debt). In the US, they are regulated by the Federal Trade Commission and can cut debt in exchange for a fee. For example, they may be able to reduce the debt by 50% and add their own fee to this. The fees are only typically paid after a successful negotiation. You may be able to get out of debt much sooner this way, but the drawback is that debt settlements can impact credit scores and creditors can potentially take legal action against you for unpaid accounts.
Bankruptcy should always be a last resort because of the long-term damage to your credit rating, up to 10 years.
Student Loan Debt
Education is critically important in the development from youth to young adult. It is during this time that most young people live away from their parents and accustomed support system for the very first time. Opportunities to develop new habits and test the effectiveness of the ones they currently have. There can be no denying the fact that an individual open to, and excited about learning and trying new things, will have a significant life advantage over someone that has not or is not interested in expanding their perspective and personal experiences.
There is no rule that says this growth and development must happen in a university or college environment. In some cases, it is no longer required as a first step in career development.
You must be sure to research what is it you are interested in pursuing to learn to get to your best path forward. If that path is through a College or University, fantastic, but that path may also come from on-the-job experience from an environment that you are already certain you have a passion for.
You may also find your path from volunteering your time in an area that excites you, or perhaps an opportunity for an unpaid apprenticeship with an experienced master, is exactly what you need to get an edge in your future profession.
Why is this decision-making process so important for your current and future well-being?
If you do end up on a path that has you acquiring student debt, it can be managed and even eliminated at an accelerated rate.
Home Mortgage Debt
Runaway real estate prices in western countries have many young families believing they may never own a house during their lifetime. With housing prices in most countries increasing in price between 2.5 and 6 times higher than wages have increased over the last 25 years, the importance of determined creativity is more important than ever for new homeowners.
When that day does arrive where you finally purchase your first home, you are most likely going to get into a mortgage contract with a bank. Most people believe a home is an important asset to have and cherish which can provide incredible security in the future. With a few payment adjustments and proper planning, you could not only get your own home, but actually be mortgage free much sooner than you think. The equity in a home can also act as collateral should you see an incredible investment opportunity in the future. It is worth noting that your home is really more of a liability initially but can become an asset if you consider a few different options. We will discuss that a little further in this chapter.
If possible, you should try to get a 15-year amortized mortgage when purchasing your first home. It is not always the most important thing to put a high percentage of capital as a deposit when getting started. Getting into your first home and making payment on your principle loan is very important and the way to do it best is to have a low amortized date of 15 years which will allow for more of your money to bring down your principle loan and thus give you more equity in your home faster.
You would be shocked to see the positive effect of making your mortgage payments every 2 weeks (bi-monthly) instead of once a month, or by making one extra mortgage payment each year. This is because these extra payment strategies put your money directly against your mortgage principle and takes years off your total mortgage; years that you are no longer making interest payments.
In the chart above, one mortgage is for 30 years and the other is for 15 years. The 30 year mortgage interest paid on your loan is $214,021 and the total interest paid on the 15 year mortgage is $99,245… that is approximately $114,000 that can go towards your retirement or other investments that can make phase 3 living even more comfortable.
If you are ready to be a young homeowner, a duplex or suited basement allows for income to be generated while you live in your first home. This turns your home from a liability into an asset because you are now generating income from your home. Liabilities cost you money and assets make you money.
Quick question. Is your car an asset or a liability?
Another quick question, when looking to borrow money from the bank, do they want to see more assets or liabilities?
I think we all know the answers to these 2 questions… ASSETS.
Owning your own home early in life, when you don’t mind having roommates or an occupied basement suite can put you miles ahead in the home ownership game.
Later in life when the time comes to purchase a home for a family, you will have options. You can keep your first home with renters, fill the space you were occupying to add to your income and pay that mortgage down at an even quicker pace. The bank will see that property as an asset which can make borrowing even easier and less expensive. You are also free to use the equity in that home as collateral for the new home. Now you are both a homeowner and landlord.
While you are living in your home with renters or roommates, if you find yourself in the position where your mortgage is mostly covered from this income, you should still be paying a mortgage payment to yourself. Why? Because carrying a mortgage is carrying debt and you want to eliminate debt as fast as possible which will give you the freedom to do many different things in life as you set a solid financial footing. You would have been paying that mortgage payment if you didn’t have renters right?
If you think about it, while most people are going through their mid-life crisis at age 50, you will be debt free and own your own home worth double what you paid. Through your work you have gained valuable experience, have access to a network of professionals, and have the liberty to consider other income opportunities. You are in a position to choose if you want to work or not for the rest of your life!
Real estate investments are a wonderful way to provide you even more security and revenue in your later years which we will discuss in more detail in the Property Investing chapter.
Now I know what you might be thinking, but that only works if I am young enough to get started early and to an extent you are absolutely right, but the principles of what is being expressed here still apply no matter where you are in life, therefore, the best time to get started in now!
The only way you can catch up if you find yourself a bit behind financially is to increase your income. That can be done by moving up the ladder in your current job, considering a new job or career change that pays much more or getting another stream of income to compliment your existing income. It’s also important to understand that banks and private lenders have many creative lending programs that can get you into different income generating opportunities.
In today’s social sharing economy, it’s quite easy to earn extra money on the side. This will take away from your spare time, but if done right, could generate significant income by leveraging your time. In the multiple steams of income chapter, we will explain the power of leveraging other peoples time and the advantages sharing unifii with others can provide.
Car manufacturers are skilled at marketing and selling their products. They know you have probably already committed all your available income for this year, so they attempt to be first in line for your next year’s income. How do they do this? Easy, offer you 0% financing for a period of time and no cash down payment, making things very easy for anyone, including those with questionable credit to purchase a new car. You lock yourself in to 60 or more months of car payments, and if you choose to lease rather than own, you will still have a significant balloon payment before you own your car.
Don’t be fooled by how easy the purchasing process for buying a new car is. If you are still young and developing your career, you are not really buying a car – you are selling your freedom, beholden to monthly payments that steal your options for a change in career or the opportunity to apprentice with a master with the skills you aspire to have, because you need to maintain your current income to make unnecessary monthly payments for a new car you don’t really need.
Instead, consider not getting a brand-new car for your first vehicle. As a first car buyer, you should consider buying a used, but reliable car with low mileage is your best bet.
Let’s say you can find a good reliable used car for $5,000. Consider putting a down payment of $2000. Now by making 6 monthly payments of $500 a month (which you would have done if you bought a new car), in 6 months your loan is paid off (NOT 60 months!), and you now have good credit history to help you with your mortgage application.
Continue to make the same Car Payments, only to yourself in a savings account at $500 a month. Remember, if you had bought a new car, you would have no choice but to make $500 payments for 60 months, so instead of paying them, pay yourself! In 2 years, you will have $12,000 plus interest. Fast forward 2 years and sell the current car for say $4000 plus the $12,000 you have saved, and you now have $16,000 to get you a nicer even more reliable used car paid for in cash!
Continue this constructive process of paying yourself car payments of $500 a month for 3 years and you now have $18,000 and your 2nd car would be worth at least $10,000 for a total of $28,000.
At this point you have many options for a very nice used car or even 2 cars. Take note that luxury cars typically depreciate incredibly fast once they are over 4 years old. They are usually maintained better and designed to last a very long time. For fun, go online and see for yourself what kind of 4-year-old luxury car you can purchase for $28,000. In many cases you are paying 70% less than new!!! I currently have a 2003 BMW 745 Li and a 2008 Mercedes Benz GL450. Combined they are worth over $200,000 new, yet I only paid $37,000 for both of them over 7 years ago. To get the most out of my cars, I do the scheduled maintenance suggested by the manufacture and have them detailed every spring which keeps them looking and running just like new!
As an added bonus, the whole time you were paying yourself your own car loan you were making interest, rather than paying it, and building a secondary emergency fund on the side just in case you ever had a serious threat to your income or wanted to start investing in other positive cash flow projects like real estate.