People have been wary about debt for a long time. In the first century B.C, the Roman thinker Publilus Syrus said, “Debt is the slavery of the free.” He’s right, however; debt can also be a useful tool.
In 1996, Muhammad Yunus of Bangladesh won a Nobel Prize for pioneering “micro loans,” which extend small business loans to poor people. These mini-loans average just $200 each and have helped millions of poor people across the globe jumpstart their a business and help grow their local economy.
Besides the question of whether debt is “good” or “bad,” there are the complexities of holding debt. How fast should I pay-down my mortgage? What about my student loans? Which credit card should I be paying-off?
The rule of thumb is to pay down your debt starting with the highest-interest debt first, paying special attention to credit cards. Your mortgage, student loans and most auto loans tend to have terms that are more stable. In other words, if you have a 6% fixed interest rate on your home mortgage and are in good standing with your loan company, they’re not going to raise your interest rates. Credit card companies, on the other hand, can be sneaky. Credit card debt is the most difficult kind of debt to carry because it requires your constant attention. You need to keep up with payments each month and follow the rules of your crewmember agreement or risk heavy penalties, which usually result in more debt.
Before you can reduce and eliminate your debt, you must have a picture of your total financial picture. Create your balance sheet—a list of your assets (home, bank accounts, investment accounts etc.) and liabilities (mortgage, credit card debt, car loan etc.). Your net worth is your assets minus your liabilities. With your balance sheet in hand, you’re ready to hatch a plan to eliminate your debt.
Don’t let the words “eliminate your debt” scare you. You can eliminate your debt; not overnight and probably not even by next year. Don worry about how long it’s going to take—just create your plan. Remember, you’re getting rich slowly.
Step 1: Stop acquiring new debt. This step takes one minute. This may seem obvious, but the reason you have debt is because you’ve piled new debt on top of old. Cut up your credit cards. Some experts will tell you that you need at least one as a safety net. I agree with this theory for the most disciplined individuals, but for people that have a chronic debt problem, something has to give. An alcoholic can’t have one drink. A debt-o-holic cannot have one credit card. I also suggest stopping any recurring monthly payments that hit your credit card, such as gym memberships, Wine of the Month Club and so on. Stop using credit.
Step 2: Establish an emergency fund. This step takes several months. Whether you’re a debt-o-holic or not, establish an emergency fund. It’s easy to start. Establish a new bank savings account, and then ask your employer to initiate a direct deposit of $50 (or whatever you can afford) from every paycheck to the savings account. If the bank gives you an ATM card for this account, destroy it. After a year goes by, if you still have a credit card, cut it up.
Step 3: Declare war on your debt. This step may take several years. Go to your balance sheet and rank your debt by its interest rate, from highest to lowest. Look at each debt individually and record the minimum monthly payment and add them all up. You know you have to come up with at least this much each month just to keep from going deeper into debt. Now, designate a certain amount—beyond the total minimum monthly payments to pay toward the debt that’s tops on your list. Make clear notes for what you’re planning to do. Now you’re at war with your debt. Execute your plan every month. Win the monthly battles and you’ll win the war.
As you’re following these steps, don’t lose focus on the big picture. You can do other things to improve your money situation while you’re working on these three steps. Read. There are countless books that can be a huge help along the way. I highly recommend The Millionaire Next Door, by Thomas Stanley and William Danko. I haven’t read it yet, but I’ve heard very good things about Dave Ramsey’s The Total Money Makeover. He offers a very detailed step-by-step guide to personal financial management.
To achieve your long-term goal of getting rich slowly, you’re going to need to change the way you do things financially. The three most important things wealthy people do are: They live below their means. They allocate their time, energy and money efficiently. They do not care about displaying a high social status. Commit these to memory until they become a way of life. Remind yourself everyday, “Live below your means…Allocate your resources efficiently…Forget about your social status.” This is how most millionaires think. Remember, wealth is what you accumulate, not what you spend.
I got messy wit hmy burden of credit card debt. Could you give me some advice for beat it. Thank you