Debt is at best, a very volatile tool and at worst, the ball and chain that prevents you from obtaining your financial freedom. Very often it is the latter, which means that it is crucial to pay off debt. Over 80% of Americans have money they owe. A European visitor I met said “it is un-American to not be in debt.” Owing money is so common and great in America that people from other countries believe it has been embedded in our culture.
Many people argue that there is good and bad debt. It is bad if used on purchases in which do not increase in value, much like cars. It is good if used on purchases that generally increase in value, like houses or education. I say, what a load of crock. Tell a person drowning in their mortgage that their mortgage was good. Or tell someone working at a fast food joint that can barely pay off their student loan that their student loan is good. You can only say that there is a distinction between good and bad debt when you tell these people their debt was good.
Some people got a good return from the investment they got in debt for. While I see how debt might be good in these circumstances, it is worth mentioning these people carefully calculate risk and manage their debt. This allows them to manage and pay off debt efficiently. Congratulations to them (no sarcasm, I’m being sincere).
However borrowing money that is not managed can be very similar to buying off the margin, in which people purchase more stocks by borrowing money. I do not recommend this method, as this method requires constant care and knowledge into your investment. This is one of the causes for the Great Depression of 1929. People were rich in theory, but once their fortunes changed (pun intended), their wealth crashed and burned.
According to Forbes, the average American spends $1.33 for every dollar they earn. The other 33 cents come from savings or debt. No wonder that the average American is in considerable debt.
The total household debt in the U.S. is $13 trillion, which is about 2/3 of the national debt. Altogether, Americans owe almost $4 trillion for consumer goods, and almost a trillion of that is in credit card debt. Unfortunately, mortgage is not much better with $9 trillion in property. The latter I can understand. Mortgages are used on a good which should not be guaranteed, but on a good which should increase in value while putting a roof over you. However, a mortgage is often is a liability. According to a Harvard study, almost 40 million people cannot afford the houses they took out a mortgage on.
I have never had a federal student loan, I was very lucky. My wife did though. The key word here is “did.” Before I proposed to her, we decided it was best to have a battle plan. After we said our vows, our debt vanished in 16 months, and my only regret is that we did not use every asset we had (short of our Roth IRA) to help destroy it. It would not have lasted a year.
The missus and I have a different mentality when it comes to debt than most people. Most people see it as a problem. We see it as a conquest.
Imagine someone breaks into your home and threatens the well-being of you and your loved ones. Would you hold back any of your fury to remove this threat? Many people have moral standings against violence, and I do not blame them. However, now let’s imagine this threat is a contract essentially a piece of paper. It still threatens your loved ones’ well-being. Would your moral standing hold your fury back, or would it fuel your fury even more?
As I see it, you have no reason to hold back from eliminating this threat from your well-being. So show yourself exactly how strong and powerful you are by unleashing all the potential inside of you to become pay off your debt and become debt-free.
I built up some wealth when I was young. I did not hesitate much to withdraw some of it to deal a blow to the money my wife and I owe. My wife withdrew some of her savings. This withdrawal is crucial, as not only will this pay off a larger chunk of debt, but it will significantly raise your morale.
While you should always put as much money as reasonably possible from you paycheck and income towards your debt, it is also crucial to take every bonus and unexpected money and put that towards it. This helps with keeping your morale high while dealing massive blows to your enemy...Oh sorry, I meant your debt.
Many people debate on the general approach to pay off debts. The snowball approach of paying off debt starts with the smallest and paying the largest later. Then money that would normally go towards this would accumulate like a snowball. The “snowball” builds momentum, then the momentum would bring the remaining debts down.
The avalanche approach starts with paying off the debt with the highest interest rate. This not only finishes off the debt which is pulling the most money from you, but then the extra money causes the remaining debt to collapse like an avalanche.
The dispersed method pays off each debtor equally.
So which one is better?
Since the dispersed method neither eliminates any debt quickly, nor lowers the amount pulled from your pocket quickly, this is not the optimal method. This leaves behind the snowball and avalanche approach.
The avalanche approach on paper is the best method, as it uses less money. However, that would require perfect logic and calculations. When have people been commonly known for that?
It is better to bring up people’s morale, and I am not the only person to believe that. A study shows that the snowball approach is the most effective way to pay off debt. Try paying off your smallest debt first. When you feel like you’re on fire, see how quickly your fire can make your larger debts burn.
While I am proud of conquering my wife’s and my debt, I would be lying if I said I could have handled it alone. My wife strongly supported the idea of removing our debt as quickly as possible, which is not too common. We put as much of our paychecks aside to pay it off as soon as possible. Every penny of our tax refund went to pay it off. It was not easy just to give up this money, but we are very happy we conquered it.
Many unexpected gifts can act as excellent tools to deal a good blow to your debt. Instead of spending that money, “label” it not as a way to pay off the people you owe, but as your chance to become debt-free. You will be surprised at how much better it feels to pay back the people you owe.
Only ask other people for money as an absolute last resort. This is your conquest, and asking other people for money to pay off your debt is just another form of owing others.
There are many benefits of living debt-free. For one, you do not have to worry about the APR anymore. Depending on the size of your debt, the average credit card APR of a new card holder is 14.9%, and the lowest mortgage APR is 2.75%. Without worrying about APR, you would have more money in your pocket.
You will also have more financial freedom. Ever since my wife and I paid off our student loan, we have saved and invested more. Every month now she looks at her accounts and she said: “sweetie, did I always make this much money?” That could be you too. In fact a study at Purdue suggested that while money can buy happiness, but debt plays as large if not a larger role in your happiness and contentment.
A Northwestern study shows that high amounts of debt generally raise stress and depression. This naturally reflects on a person’s blood pressure. A paper shows that economic-induced stress can affect a person’s attention, memory, and self-control over the rest of their finances.
Unfortunately, these mental afflictions can carry over physically. A Huffington Post article sadly points out that many people strongly consider suicide because of money they owe.
There is much to do to take care of the money you owe, and you cannot put a price on the benefits you will receive (except the financial benefits). One thing to note before you start your battle with debt is that the money you owe does not make you a loser, failure, inadequate, dumb, or any other version of the word. Unfortunately, financial insecurity is common in America. Being in debt is not an exception, but a rule. You should start to rewrite your rules to secure your own future and forge your wealth.
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