Thursday, January 16, 2014

“Why debt is dumb.”

I believe that debt is dumb. In Western culture, we seem to worship debt like it is the god of money. But, let me tell you something: it is not the god of anything. In fact, debt is probably the most destructive financial device you could use to accomplish your goals. You are probably thinking, “But, I already have a lot of debt… what do I do now?” Fret not because I am going to walk you through some steps to rid yourself of debt and starting building immense wealth.

First of all, I should start by telling you why I think debt is such a horrible process. Debt is a tool that people use to take money that isn't theirs, spend it, and then pay it back (oftentimes with interest) over a period of time. In a way, the purchase we make, be it a car, school, or even a home, does not belong to us when we buy it on debt. Think for a moment about what you are doing to yourself when you buy something on debt. You are putting yourself in slavery. You are allowing somebody else to own a part of your life for a period of time. During this time, you are not yourself. You are a servant to whomever you owe money.

If that does not immediately scare you, let’s look at some math. Say you buy something for 2000 dollars, and you are making 200 dollar payments on it, and your financing rate for the balance after each payment is 3%. After your first payment, you would have $1854 left to pay. After your second payment, $1703.62.Then, $1548.73, and so on. You would end up paying hundreds of dollars in interest. Let’s say, instead of borrowing to buy this item, you save up for it. You pay yourself 200 dollars a month and also put it in a savings account that earns little to no interest.

It would take you 10 months to save up the 2000 dollars. But, you would also have a little over 2000 in savings, whereas if you borrowed you would have lost several hundred along the way. In addition, you would have spent an insane 12 months paying it off, and you would have paid an additional 400 dollars in interest. How does this make sense to anybody?

I imagine, if you find yourself in debt, you aren't thinking in this manner of gaining and losing money. You are most likely thinking in terms of fear or other strong emotions. You fear not having stability, so you borrow on a house instead of renting. You fear not getting to work safely, so you buy a new car on a high loan. It does not have to be this way. Borrowing is not the way to reach true freedom and power. It is a way to subjugate yourself.

If you want to get out of debt and become stronger and freer, both financially and emotionally, read on.

To get out of debt, you can try one of two methods. The snowball method, or the high interest method. The high interest method is a process by which you remove the debt with the most interest first. In this way, you are mathematically saving the most money. For people who have enormous self-control, you should try this method. If you’re like me, though, your self-control could be lacking!

The other method is called the snowball method, and it is one that I’d like to discuss now. I first heard about this process from a guy named Dave Ramsey, who is a financial guru. I took his ideas and thought about them, and now I realize that the snowball method is my personal favorite. Will it save you money? No. It will not. Most likely, you WILL lose some money to interest rates. But, stick with me for a while, and I’ll show you why I advocate it.

The debt snowball is a powerful method of relieving yourself of debt because it looks at behavioral changes. When you are working through this, you will begin to see changes in your life in the form of: less payments, less money flying out of the window, and more control over your actions and your money.

The snowball works like this. Find your smallest debt. Usually, this is a credit card debt or a small personal loan. Take all your money that is disposable income (meaning: feed you and your family, keep the lights on, keep the house yours, and be able to drive places first… then anything left over is disposable) and throw it at that smallest debt. Of course, pay the minimum payments of all your debts to keep from going delinquent! Hopefully, soon, the debt will go away.

When that bill doesn't come next month, you are going to feel so much better about yourself.

It will probably feel liberating to pay off your first debt on this journey. Hopefully, maybe that is your only debt. But, if it’s not, you’re going to take the money that you were paying that first debt with, and you’re going to apply it to the next smallest debt. So, you are now adding the minimum payment from the smallest debt and all that extra money, taking it, and throwing it on the next smallest debt. It “snowballs” and grows. It should remind you of those old cartoons that had the snowball grow as it rolled down the mountain.

If you continue to use this method, you will begin to see your debts disappear one by one. You can get extra jobs, work longer hours, and do everything you can to rid your life of slavery. Take back your life from all the lenders. Grow in your wealth. Soon, you will be debt free, and you can pay yourself all those minimum payments.

Invest that non-disposable income with an investment professional,  or educate yourself to become financially literate and watch your money soar. That, my friends, is freedom.

By: Connor Lidell.